Federal Reserve has called for the use of market discipline to enhance the work of bank regulators.
"As banking organizations become more complex, we are going to need all the help we can get, especially if we wish to avoid killing the goose that laid the golden egg through more intrusive supervision," said Federal Reserve Board Vice Chairman Roger W. Ferguson Jr. He spoke Thursday in New York, at a meeting sponsored by the Bond Market Association. A copy of the text was released here.
Mr. Ferguson recommended making a bank's cost of funds more dependent on the market's assessment of the bank's soundness. Doing so would serve two purposes, Mr. Ferguson said. It would create a disincentive for risk-taking and provide a "supplementary source of information" to bank examiners.
Market discipline has its risks, he warned, and could create pressure on banks during times of economic stress. "As policymakers, we need to balance the risk it presents with the benefits it can provide in curbing excessive risk-taking and preventing problems altogether," Mr. Ferguson said.
On Wednesday, Federal Reserve Bank of Minneapolis President Gary H. Stern said it would be "irresponsible" not to hardwire market discipline into the regulatory process. -- Rob Garver