Reuters: Regulatory News: UPDATE 1-Fed's George-must build appropriate bank safety net

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UPDATE 1-Fed's George-must build appropriate bank safety net Apr 11th 2012, 16:12 Wed Apr 11, 2012 12:12pm EDT NEW YORK, April 11 (Reuters) - One of the first steps that must be taken to build a stronger financial system in the wake of the crisis is to correct the incentives and "improper expansion" of federal safety net protections that allowed institutions to take excessive risks, a top Federal Reserve official said on Wednesday. "With regard to correcting the incentives in banking, the most important challenge we face is in constructing an appropriate, but carefully limited, public safety net," Kansas City Federal Reserve President Esther George said in prepared remarks. George said in recent years, bank supervision has take a more passive role and that a return to its traditional one of "exercising sound judgement and making informed decisions" is needed. The expansion of the safety net for institutions during the financial crisis has led to a broad and pervasive range of moral hazard issues, George said. "This link between large institutions and special public support has left us trapped in a pattern in which public authorities believe they must expand the safety net each time a crisis is brought on by excesses in risk-taking at large financial institutions," said George. "This broadening of the safety net facilitates the next and even more severe crisis, as new moral hazard issues are introduced and major institutions are left with greater incentives for taking on risk," George said during a conference on financial instability in New York. George said one of the first and most important steps is to eliminate so-called "too big to fail" policies that propped up banks during the crisis. Link this Share this Digg this Email Reprints

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