Federal Reserve Board Governor Laurence H. Meyer said Thursday that the government should rely more on the market to police internationally active banks.
Big banks could be required to issue uninsured subordinated debt that would be publicly traded, Mr. Meyer said in wide-ranging remarks to students at Widener University, Chester, Pa.
"Holders of such debt would have a strong incentive to require the bank to manage its risk prudently," Mr. Meyer said. "In addition, it would be highly desirable if this debt were traded on the open market, thereby providing a clear signal of the market's evaluation of the bank's financial condition."
Mr. Meyer also said the Federal Deposit Insurance Corp. should be allowed to bulk up its reserves beyond the 1.25% ratio set by Congress.
Currently, the FDIC must hold $1.25 for every $100 in insured deposits. But because its costs have been so low in recent years, its reserves are way above that level today. As a result, 95% of the industry is not charged for insurance.
Eliminating the 1.25% requirement would allow the FDIC to impose risk- based premiums that truly reflect the differences in the investment strategies among banks, Mr. Meyer said.
"Loosening this constraint might allow for more accurate pricing of deposit insurance," he said.
Mr. Meyer also endorsed the pre-commitment approach to risk-based capital, an experimental system in which a bank uses internal models to determine appropriate capital levels. The government would penalize banks that miscalculate.
The Fed governor also reiterated the central bank's call for Congress to enact financial reform. "The forces of technology and globalization will deregulate in one way or another," he said. "I and my colleagues would prefer that the Congress guide those changes in the public interest, but legislative deadlock will not do the job because the status quo will not hold."
Mr. Meyer said he sees little problem with the continuing consolidation among large banks, noting that competition remains fierce in most local markets.
The percentage of banking assets held by the 10 largest institutions hit 34% in 1997, up from 22% in 1980, he said. But the average market concentration level is virtually unchanged during the same 18-year period, he said.
Mr. Meyer said he has become "particularly concerned" with a number of recent mergers that resulted in significant concentrations in multiple markets. The Fed will approve these deals only if there are substantial mitigating factors, he said, though he did not specify what those factors are.
