WASHINGTON Dec 3 U.S. banks are likely to cut
back on risky short-term funding if markets believe bankruptcy
not bailouts await them, a top Federal Reserve is set to tell
lawmakers on Tuesday.
Jeffrey Lacker, president of the Federal Reserve Bank of
Richmond, is expected to tell Congress that the biggest U.S.
banks have relied on raising short-term cash because they have
expected the government to step in if their strategies failed.
"In the absence of that expectation, firms and their
creditors would have strong incentives to reduce reliance on
fragile short-term funding," Lacker said in a statement prepared
for a U.S. House of Representatives committee hearing.
Fed officials have identified short-term funding as both an
funding method that fueled the 2007-2009 financial crisis and a
continuing threat to the financial system.
The 2010 Dodd-Frank law requires firms such as JPMorgan
Chase, Goldman Sachs and Citigroup to draw
up so-called "living wills," or blueprints for how they could go
through bankruptcy without government support.
If regulators find the plans insufficient, they can force
banks to shrink in size or raise more capital. Failed banks that
are deemed unable to go through bankruptcy would be seized by
the Federal Deposit Insurance Corp. (FDIC) and resolved using
new liquidation powers assigned to the agency by Dodd-Frank.
Lacker said he prefers requiring banks to beef up their
living wills and plan for bankruptcy rather than count on FDIC
liquidation in a crisis.
Maintaining a government role in resolutions reduces the
incentive for too-big-to-fail banks to make structural changes,
such as slashing risky funding, he said.
Fed Governor Daniel Tarullo has said firms that raise
short-term cash from other banks should be forced to boost their
capital ratios to offset the risk.
Lacker said he was open to prohibiting risky activities or
cracking down on banks' size to make it easier for them to go
through bankruptcy. But until banks write credible living wills,
regulators will not be able to write those rules, he said.
"I am open to the notion that such restrictions may
ultimately be necessary to achieve a more stable financial
system, but I do not believe we have a strong basis yet for
determining exactly what activity and size limits should be
adopted," he said.
Forcing banks to fully prepare for bankruptcy also would
allow the U.S. government to wind down other emergency lending
programs, such as the Fed's power to lend in "unusual and