One key way of ensuring the financial troubles of recent years are not repeated would be to make banks hold more capital, the president of the Federal Reserve Bank of Boston, Eric Rosengren, said Wednesday.
He was one of several Fed officials to address public policy matters ranging from "too big to fail" to the European debt crisis.
Rosengren said banks across the financial system should have higher capital standards and should hold reserves for more than just accrued losses. His comments came from a presentation he gave at a conference held by the Atlanta Fed.
"We need more capital going forward than we did going into this crisis," Rosengren said. "Holding more capital is clearly one of the things we need to do" and this applies not just to the so-called systemically important banks, but smaller institutions which can run into trouble from things like local commercial real estate lending.
Rosengren also said that there needs to be put in place a way for financial institutions to hold onto capital in times of trouble, including limiting dividends and stock buybacks, along with the creation of "mandatory" convertible debt. "It's much easier to have them stop flowing the capital out" during a crisis, rather than to try to make banks raise new capital, he said.
Rosengren said it's also important to create an infrastructure to allow an institution to fail with minimal pain. Self-generated plans to wind down operations known as living wills would be valuable, as would linking executive bonuses to capital levels, he said. Rosengren said these, along with higher capital levels for complex financial institutions, would help reduce the severity of a failure.
"We need multiple weapons" to make the financial system more resilient, he said.
At the same event, the Atlanta Fed's president, Dennis Lockhart, said that over the near term, issues of systemic risk and "too big to fail" banks are problems that will have to be managed, with fixes some time down the road.
"I doubt we can eliminate or legislate away 'too big to fail' and systemic risk in the short term," Lockhart said in comments to close the conference.
He said "crises will re-occur" and events in Europe stemming from the Greek debt troubles "may have been a little bit of a reminder and wake-up call to that effect." Increasing market instability and worries about other indebted European nations caused European authorities to put in place a $1 trillion bailout package. The Fed reopened currency swap lines to ensure the flow of dollars and to ward off financial instability.
Lockhart said that there's "no silver bullet" that will eliminate the risk that some banks will grow so large as to upend the financial system when they run into trouble. He advocated for a "mix of measures" including higher- and better-quality capital levels, better supervision, some separation between deposit-taking banks and risky trading activities, along with improved coordination between international authorities.
Separately, in a speech before Tennessee bankers Wednesday, the St. Louis Fed's president, James Bullard, touched on the currency swap line program the Fed announced Sunday it's reintroducing.
"When the crisis was at its peak in the fall of 2008 and the first part of 2009, those swap lines were heavily used across the countries," Bullard said.
"But even though we've reopened the swap lines, it remains to be seen whether those swap lines will be used as much as before."