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Size of too-big-to-fail problem needs broad tracking: Fed's Kocherlakota
November 19, 2013 / 12:51 AM / in 4 years

Size of too-big-to-fail problem needs broad tracking: Fed's Kocherlakota

MINNEAPOLIS (Reuters) - A top U.S. central banker on Monday urged fellow regulators to use an array of measures to determine the size of the so-called too-big-to-fail problem, in which investors assume that large banks will receive a government bailout if they run into trouble.

Minneapolis Federal Reserve Bank President Narayana Kocherlakota speaks at a macro-finance conference hosted by the Boston Federal Reserve Bank and Boston University in Boston, Massachusetts November 30, 2012. REUTERS/Brian Snyder

In a speech, the president of the Minneapolis Federal Reserve Bank, Narayana Kocherlakota, did not comment on monetary policy or the U.S. economy. Instead he addressed a problem that continues to hamper financial regulators like the Fed five years after the worst of the financial crisis.

The U.S. government in 2008 provided funds to help JPMorgan Chase & Co acquire floundering investment bank Bear Stearns, and the government itself took on the troubled assets of the giant insurer AIG, sowing the seeds of the problem.

While JPMorgan, Citigroup Inc and other Wall Street banks now have to hold more capital to protect against losses than before the crisis and must plan ahead for possible bankruptcies, they still enjoy a too-big-to-fail “subsidy” that regulators worry allows them to borrow at cheaper rates than would otherwise be the case.

Many institutions have tried to measure that subsidy but, as Kocherlakota said in remarks prepared for delivery on Monday, those measures are imperfect.

“Rather than using no measures, policymakers should be tracking all measures that are viewed as being at least somewhat informative about the size of the subsidy,” Kocherlakota said in the remarks to be delivered to a conference hosted by his Fed bank on quantifying the too-big-to-fail subsidy.

Writing by Jonathan Spicer; Editing by Leslie Adler

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