Regulators eventually will require securities traders to settle stock and bond deals in one day, Federal Reserve Board Governor Lawrence B. Lindsey said Thursday.
"Over time, the pressure is irresistible," Mr. Lindsey said. "But I can't make a prediction as to when this will occur."
Mr. Lindsey, speaking at a conference sponsored by the Brookings Institution, said the current three-day system lets traders gamble with the float between the time they buy a security and the time they must pay for it.
In wide-ranging remarks, Mr. Lindsey also questioned whether market forces alone can prevent banking crises like those that hit Texas and New England in the 1980s.
Texas banks, for example, made energy loans based on widespread predictions of ever-rising prices for oil and other fuels. When the market collapsed, these banks were doomed, he said.
Financial markets, however, would have relied on the same forecasts of energy demand as banks did, he said. And that means they would have worsened the problem by running up the stock prices of banks that made the largest number of energy-related loans.
"I'm not sure the markets will solve a macroeconomic crisis," Mr. Lindsey said.
Regulators had no choice but to move to risk-based supervision, according to the Fed governor. Bank balance sheets used to change little between exams. But today derivatives and other complex securities let banks incur big gains and losses overnight.
"These days, a bank's balance sheet is more like a motion picture ... than a snapshot," he said.
Risk-based supervision lets regulators look at internal controls, management oversight, and capital requirements. These three key elements help keep an institution out of trouble, he said.
At the same conference, Robert E. Litan, a member of the Shadow Financial Regulatory Committee, urged the Fed to require all banks to hold a portion of their capital in subordinated bonds. This would force banks to go to the capital markets quarterly, adding market discipline to an industry backed by deposit insurance.