Fed's Stein: Despite progress, large banks still have an edge

WASHINGTON Wed Apr 17, 2013 9:30am EDT

Federal Reserve Board of Governors member Jeremy Stein listens during an open board meeting at the Federal Reserve in Washington December 14, 2012. REUTERS/Kevin Lamarque

Federal Reserve Board of Governors member Jeremy Stein listens during an open board meeting at the Federal Reserve in Washington December 14, 2012.

Credit: Reuters/Kevin Lamarque

WASHINGTON (Reuters) - Large U.S. financial firms still gain some benefit from the perception that their size makes them too big to fail, a top Federal Reserve official said on Wednesday.

Fed Board Governor Jeremy Stein said some progress had been made in removing the perception that the authorities will bail out failing Wall Street giants.

But he added more needs to be done, citing stronger credit ratings for the largest banks.

"This uplift confers a funding subsidy to the largest financial firms," Stein told an International Monetary Fund conference.

"Even if bailouts were commonly understood to be a zero-probability event, the problem of spillovers remains."

Some top Fed officials, like Dallas Fed President Richard Fisher, have called on regulators to break up the largest institutions so that they might be wound down without too much trouble if they run into trouble.

But Stein said he prefers to let Dodd-Frank financial reforms, which gives supervisors new authority to resolve large firms, to run their course.

"I believe that the way to get there is not by abandoning the current reform agenda, but rather by sticking to its broad contours and ratcheting up its forcefulness," he said.

(Editing by Chizu Nomiyama and; James Dalgleish)

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