Dinner Keynote Address at the Financial Markets Conference “Maintaining Financial Stability: Holding a Tiger by the Tail” at the Federal Reserve Bank of Atlanta.
Chairman Brady, Vice Chair Klobuchar, other members of the Committee, thank you for Thank you for the opportunity to speak at this conference on financial stability. I would like to use the opportunity to discuss three interrelated proposals to bolster and maintain financial stability. The first would reform the rules of bankruptcy to handle large financial institutions with a minimum of disruption. The second would put aside any plans for temporary countercyclical capital buffers and focus macro-prudential policy simply on setting permanent and appropriate capital and subordinated debt ratios. The third would start to move back to a more rules-based monetary policy. Taken together these proposals would constitute a sound overall strategy to improve financial and economic stability.
Bankruptcy Reform
Reform of the bankruptcy code to deal with large financial institutions is now overdue. In the five years since the financial crisis, there has been much useful work and discussion on why and how to proceed with reform—both before and since the passage of the Dodd-Frank Act. Books and articles have been written. Conferences have been held. Government reports have been issued, including by the Federal Reserve Board and the Government Accountability Office. And private working groups and research projects are refining proposals. But the time for study is ending, and the time for action is now.
An important reason for reform is that large financial firms still seem to be enjoying a huge subsidy on their borrowing costs due to market expectations of bailouts. According to a widely-cited Bloomberg calculation, based on an International Monetary Fund study, the subsidy mounts to $83 billion per year.
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