OT? - Atlanta Fed's Guynn says let unsound banks fail

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NEW YORK, Nov 9 (Reuters) - The Federal Reserve's goal in bank supervision is to reduce systemic risk, but preventing failures of unsound banks may not serve that objective, one regional Fed president said on Tuesday.

Atlanta Fed president Jack Guynn, in a speech to the American Institute of Certified Public Accountants in Washington, said supervisors should aim instead to contain system-wide risks to U.S. banking from failing institutions.

``We cannot and should not stop an institution from failing if it isn't fundamentally sound,'' Guynn said, according to a prepared text of his speech made available to reporters in advance of delivery.

``The goal (of bank supervisors) I suspect will always be mitigation of systemic risk. But it may no longer be possible or desirable to mitigate systemic risk by preventing the failure of individual financial institutions.''

Guynn said the financial crises of 1987 and 1998 demonstrated financial system shocks can hurt the real economy. That underscored the need for continued regulation aimed at preserving the safety and soundness of U.S. financial system.

``Ongoing supervision and regulation is essential both to reduce the probability of future shocks and to help us manage those shocks that do occur,'' he said.

However, the Fed and other supervisors need to redefine the terms ``safety and soundness'', he added.

Markets now move faster than supervisors in signaling the need for regulatory changes, and markets should shoulder more of the risks for bank failures, he said.

``As for the safety and soundness of the financial system as a whole, the best thing we can do is help the market police itself.''

The role of supervisors will shift to requiring more transparency in banks, to ensure markets get the information they need from individual institutions.

But supervisors are not irrelevant, he said.

``For one thing, the market's rules and incentives are not necessarily aligned with the interests of taxpayers and consumers. For another, the market's corruption prevention record is less than stellar,'' he said.

Guynn welcomed the newly passed reforms to Depression-era U.S. banking laws, saying it was the most important step in the process of financial modernization.

Traditional supervisory approaches cannot keep up with innovations in financial services, Guynn noted. He said the 1988 Basel Accord's risk-based capital model is completely inadequate to determine capital requirements for many very large institutions.

The Fed is moving to rely increasingly on institutions' own risk assessment models, but many banks don't have such controls in place.

So until banks establish a more formal system of risk assessment, supervisors should continue to require that banks provide additional information about their activities to the markets.

-- Sysman (y2kboard@yahoo.com), November 09, 1999


Do you think this means the FFEIC Bank Examiners will publish their Y2K audits or that the FED will name names? I doubt it.

Sysman, BTW thanks for the post on another thread re right click mouse button to open in a new window.

-- Bill P (porterwn@one.net), November 09, 1999.

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