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For immediate release: April 26, 2010

Fed Must Retain Bank Supervision, Independence, Says Richard Fisher in Dallas Fed’s Annual Report

Strengthened Financial Regulation, Breakup of Too-Big-To-Fail Banks Also Needed, Says Fisher

DALLAS—Effective monetary policy hinges on the Federal Reserve retaining its bank regulatory role and its independence from political pressures, says Federal Reserve Bank of Dallas President and CEO Richard W. Fisher in the Bank’s 2009 Annual Report.

The breakup of too-big-to-fail (TBTF) banks and improved financial regulation are also vital to continued American prosperity, Fisher states.

“An independent Fed, equipped with the authority to responsibly execute monetary policy and aided by a strong supervisory and regulatory arm, is the most effective weapon we have to meet the need for increased stability and contain the dangerous spillovers that threaten the economy in periods of distress,” Fisher writes.

Independence from short-term, political impulses allows the Fed to focus on crafting the right mix of policies and to serve as a tougher regulator, Fisher says.

He also asserts that monetary policy and regulatory functions are symbiotic. By establishing rules for sound banking practices and making sure that banks follow them, financial regulation keeps the arteries of the financial system open.

Fisher argues the Fed should not only maintain, but also enhance its role in banking and financial regulation. An expanded Fed role in regulating nonbank financial institutions—the shadow banking system—is worth discussing, Fisher says.

Fisher favors an international accord to break up TBTF institutions into a size more manageable for the bank’s executives and regulatory supervisors.

“The time to break up TBTF banks is before the crisis—when the economy is relatively healthy and they pose no immediate dangers,” he writes. “That way, they will not be around to wreak havoc when the economy enters a period of stress.”

New regulatory rules should clamp down on excessive risk taking, Fisher states.

“An effective regulatory regime strives to corral the financial markets’ animal spirits in a way that does not inhibit the vital work of underwriting prosperity but discourages straying into yet another reckless escapade—a delicate balance indeed,” Fisher says.


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James Hoard
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