Bernanke: Failing Bank Process Needed to Reduce Crises

Fed Chairman Ben S. Bernanke (Bloomberg)

Fed Chairman Ben S. Bernanke (Bloomberg)

According to Bloomberg,

Federal Reserve Chairman Ben S. Bernanke said a process under development that would allow regulators to take down a failing bank will help ensure investors discipline weak firms and prevent them from taking risks without consequence.

“As we try to make the financial system safer, we must inevitably confront the problem of moral hazard,” Bernanke said today in remarks at an International Monetary Fund conference in Washington. “Market discipline can only limit moral hazard to the extent that debt and equity holders believe that, in the event of distress, they will bear costs.”

He addressed the economy only briefly during the panel discussion, saying that there was still “an awful lot of slack in the labor market” and said that was justification for the Fed taking “strong actions to try to support job creation.”

In response to audience questions, Bernanke said that the high level of student debt is “another drag on the recovery” although it is not likely to cause a financial crisis because most such loans are owned by the government, not financial institutions.

Financial Crises

Bernanke spoke as part of a panel discussion that included Harvard University’s Kenneth Rogoff, the co-author of the history of financial crises titled “This Time Is Different: Eight Centuries of Financial Folly”; former Bank of Israel governor Stanley Fischer; and former U.S. Treasury Secretary Larry Summers.

 

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