RICHMOND, Va., May 5 /PRNewswire/ -- Federal Reserve Bank of Richmond
issued the following:
Federal Reserve Bank of Richmond President Al Broaddus said Fed discount
window lending could undermine recent proposals to encourage market discipline
and improve incentives in banking. Broaddus made his remarks today at the
Federal Reserve Bank Structure Conference in Chicago.
He told the audience that the bank supervisor's task of containing moral
hazard has grown more difficult as banks have become more complex. He
supported a Minneapolis Fed proposal to impose coinsurance for large deposits
and recent proposals for large banks to issue subordinated debt to the public
as steps in the direction of greater market discipline. Both proposals rely on
creditors to monitor bank risk-taking.
Broaddus pointed out, however, that Fed discount window lending can "allow
uninsured depositors and other uninsured creditors to escape losses and
therefore reduce their incentive to apply market discipline." According to
Broaddus, Federal Deposit Insurance Corporation Improvement Act (FDICIA)
restraints would not prevent all instances of discount window lending to
failing institutions.
"While FIDICIA contains provisions intended to restrict Fed lending in
problem situations, the restrictions may be ineffective in particular cases, "
Broaddus said. Although legislative restrictions might help, ultimately Fed
lending restraint "will have to be home grown," he explained.
"This change will not be an easy one," Broaddus noted. "The initial
decisions in a new regime will likely surprise uninsured depositors and
creditors and disappoint their expectations." Broaddus told the audience that
however disruptive the transition may be, the short-term pain will prevent
"greater pain and disruption over the long term."
Full text of the speech can be found on the Federal Reserve Bank of
Richmond's Web site at http://www.rich.frb.org/generalinfo/speeches/.
Federal Reserve Bank of Richmond news releases can be found at
http://www.rich.frb.org.
SOURCE Federal Reserve Bank of Richmond
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CONTACT:
Marsha Shuler of the Federal Reserve Bank of
Richmond, 804-697-8706 or cell, 804-641-7016
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