WASHINGTON — Federal Reserve Board Gov. Daniel Tarullo said Wednesday that if regulators didn't move ahead with current regulatory reform efforts, the risk of a government bailout would only increase in the future.

"If we do not complete rigorous implementation of this complementary set of reforms, we will have lost the opportunity to reverse the pre-crisis trajectory of increasing 'too big to fail' risks," Tarullo said in prepared remarks before the Council on Foreign Relations in New York.

Tarullo, who heads supervision for the central bank, weighed in on the issue, which has grown in prominence in recent month as top officials have argued the law does not go far enough in solving the "too big to fail" problem. Richard Fisher, president of the Federal Reserve Bank of Dallas, and Sheila Bair, have both suggested the best way to move forward is to break up the big banks.

The governor acknowledged that there was no set of fail-safe reforms that would put to rest ongoing concerns, but if regulators didn't move ahead with current regulatory reform efforts under Dodd-Frank and Basel III, the risk that policymakers could be forced to bailout more firms in the future would only increase.

"While it is probably unrealistic to expect that any set of reforms, no matter how far-reaching, will eliminate too-big-to-fail concerns entirely, I do think that full implementation of the reforms discussed today would go a considerable distance toward diminishing expectations of government support for large banking organization, as well as the potential for damage to the financial system from the failure of a large banking firm," Tarullo said.

Regulators, he said, have an array of tools at their disposal that will go a long way to solving the "too big to fail" problem. He cited higher capital requirements, regulators' ability to resolve firms safely, and new liquidity rules as a few measures regulators can use to keep risks of another catastrophic financial crisis at bay.

His remarks, which come ahead of an anticipated meeting with top bank executives, echoed similar remarks made by Fed Chairman Ben Bernanke at last week's news conference.

Tarullo said the best way to eliminate "too big to fail" was to do away with the incentives of being a large institution. Regulators are able to take away such benefits, he said, through tougher supervision.

Of greater concern to Tarullo is the fact that even years after the crisis, reform efforts still have a long way to go.

"For some time my concern has been that the momentum generated during the crisis will wane or be directed to other issues before reforms have been completed," Tarullo said.

That includes ongoing concerns about the shadow banking system — a shared worry of Bernanke's — who first warned that increased regulation of major securities firms could encourage some parts of the

system to move into unregulated markets.

Adding to that, Tarullo cautioned that in periods of high stress and uncertainty about the value of certain assets, questions about liquidity and solvency could emerge even for regulated institutions.

"It cannot be overemphasized that this systemic effect can materialize even if no firms were individually considered 'too big to fail,'" Tarullo said.

He said regulators should act sooner than later to address some of the vulnerabilities in the shadow banking system like money market funds and tri-party repo market.

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