As policymakers seek to strengthen the financial system in the coming years, they should consider establishing a resolution process for nonbanks, Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, said Monday.

Policy responses to the collapses at Bear Stearns Cos., Lehman Brothers, and American International Group Inc. were "rushed," Mr. Hoenig said. "It is apparent that we would benefit from a clear set of rules for handling such firms, much like we have established to deal with failing depository institutions."

The process for resolving failures at nonbanks should parallel the one for handling financial institutions, he said, and should still use market forces.

"Nonbank resolutions or takeovers should leave stockholders and subordinated debtholders fully exposed to the losses in their firms," he said. "Such resolutions should provide for new management and directors, either through a merger with a sound institution or the insertion of a new management team."

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