May 06 2009

Hearing on Regulating and Resolving Institutions Considered ‘Too Big to Fail’


“Thank you, Mr. Chairman.  This morning the Committee will examine the issues associated with regulating and resolving institutions considered ‘Too Big to Fail.’  While I have long believed that no firm is too big to fail and that the market – absent government interference – will provide the best results, I recognize that this is not a widely shared view.

“The fact is, when firms of a certain size or reach in the market place encounter trouble, there will be efforts to provide them assistance to limit the presumed systemic risks associated with their collapse.  We have seen this happen over the past 18 months as extraordinary efforts involving trillions of dollars have been undertaken by the FDIC, the Treasury and the Federal Reserve to assist large institutions ‘in order to preserve financial stability.’  I do not think this effort has been an experience that anyone would like to repeat, which is why this hearing is so important.

“Today, we begin the process of determining how we can prevent a similar situation from arising in the future.  I think this examination must begin by establishing a definition or a set of criteria regarding what makes a financial institution ‘too big to fail.’  Next, we must consider whether the concept of ‘too big to fail’ has or should have a place in our modern financial market.  This will give us a very clear path forward.

“For instance, the regulatory system might be designed to prevent firms from becoming too large or interconnected in the first place.  Alternatively, the system might accommodate the growth of systemically important entities, but then provide special rules designed to reduce the likelihood that such firms could collapse or provide resolution measures that limit the systemic effects in the event of a failure.

“Addressing these issues will not be easy.  Defining the concept of ‘too big to fail’ will be difficult enough.  Designing a regulatory framework to either proscribe or accommodate systemically risky institutions will be even more formidable.  As we attempt to craft a workable regulatory scheme, we will no doubt confront many difficult choices.  It is my hope that we will choose wisely because – in my view – it is critical that we continue to foster economic innovation and growth while we seek to provide greater stability in our financial markets.

“That said, the status quo and the possibility of a repeat of the last 18 months is not acceptable.  We must examine the facts, ask the tough questions and then move forward with a deliberative process where all the stakeholders have an opportunity to be heard.

“Thank you, Mr. Chairman.”