JEKYLL ISLAND, Georgia (Reuters) - Financial market conditions are more stable than at the height of the crisis in 2008 but it would be premature to say the storm is over, Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday.
“I believe that conditions are now calmer but it is too soon to breathe easy,” he said in remarks to a conference organized by his institution.
Federal Reserve Chairman Ben Bernanke, speaking on Monday to the same conference, described financial markets as “fragile,” but said he was encouraged by early signs that the government “stress tests” for banks were beginning to restore investor confidence and lay the groundwork for banks to raise private capital.
Bernanke also said the Fed has been thinking hard about how to withdraw, when the time is appropriate, the massive amounts of money it has pumped into the financial system to choke off any unwanted inflation when economic recovery begins to take hold.
Addressing growing momentum to overhaul financial oversight to prevent another crisis, Lockhart said authorities must be careful to avoid shackling them too tightly.
“We don’t want to regulate innovation away but we do want to enable policy to evolve with it,” he said. “In my view the goal should be to preserve the benefits of financial innovation while eliminating any systemic risk that may come with it.”
Systemic risk refers to the danger that problems at any one bank or firm or in any one asset class may spread and damage the health of the overall financial system. The Obama administration is expected to propose legislation calling for the Fed to play a central role in regulating systemic risk in the economy.
Now that the U.S. bank stress tests are over, the administration is refocusing on a drive to tighten regulation of banks and markets.
Bernanke said on Monday that one of the lessons of the recent crisis is that regulators must look at risks to the broader financial system and can no longer focus simply on banks one by one.
The Fed meeting on Jekyll Island to discuss the aftermath of the worst financial crisis since the Great Depression had historical echoes of a meeting almost a hundred years ago, when top Wall Street financiers slipped away with government officials to same spot disguised as a duck hunting party to hammer out a blueprint to prevent bank panics.
The discussions formed the basis for what became the Federal Reserve Act of 1913, the foundation of the modern U.S. central bank.
“We meet here almost a hundred years later to explore contemporary aspects of the same issues,” Lockhart said.
Reporting by Alister Bull and Mark Felsenthal; Editing by Neil Stempleman