Fed’s Lacker: Letting Banks Fail will Restore Market Discipline

Policymakers must ensure that financial industry creditors do not expect government bailouts and must be willing to let firms fail in order to restore market discipline, a top Federal Reserve official said on Tuesday.

The remarks by Jeffrey Lacker, president of the Richmond Federal Reserve Bank, repeated much of what he has previously said about what regulators need to do to make the financial system safer. Lacker, a voting member this year on the Fed’s policy-setting committee, did not discuss monetary policy.

The long-term solution to ending too-big-to-fail banks is restoring market discipline “so that financial firms and their creditors have an incentive to avoid fragile funding arrangements,” Lacker said in remarks prepared for delivery at the Louisiana State University Graduate School of Banking.