UPDATE 1-Fed’s Lacker says bailout issues not yet resolved

(Adds details, background)

By Pedro Nicolaci da Costa

WASHINGTON, March 29 (Reuters) – New U.S. financial rules
leave regulators with too much discretion on what firms can
receive bailouts, potentially contributing to financial
instability, a top Fed official will testify on Wednesday.

Jeffrey Lacker, president of the Richmond Federal Reserve
Bank, said in prepared testimony that the Dodd-Frank banking
reform laws don’t go far enough in limiting implicit government
protection for financial firms and others.

“The Fed … retains some discretionary power to lend to
non-bank entities. This creates continued uncertainty about
possible rescues, as well as gaps in our ability to provide
clear, credible constraints on the safety net,” Lacker said in
the testimony to be given before the U.S. House of
Representatives’ Oversight and Investigations Subcommittee on

“Continued ambiguity thus would pose risks to financial
stability and the economy, including the risk of new costs to
taxpayers,” he said in the prepared text, made available on the
Richmond Fed’s website.

The full text of his remarks can be found at

In the past, Lacker has argued that banks considered too
big to fail should be broken up. Defenders of the Dodd-Frank
legislation, including Fed Chairman Ben Bernanke, say new
resolution authorities and tougher capital standards for large
firms will do the trick.

Others at the central bank, including Lacker and other
regional Fed presidents like Kansas City’s Thomas Hoenig and
Richard Fisher of the Dallas Fed, have their doubts.

“The disagreeable but sound thing to do regarding
institutions that are too big to fail is to dismantle them over
time into institutions that can be prudently managed and
regulated across borders,” Fisher said early last year, when
Dodd-Frank was under active debate.

Lacker’s views on monetary policy also make him somewhat of
a maverick on the committee. He opposed the second round of
bond purchases, arguing that they would not have a major
beneficial effect on economic growth and risked sowing the
seeds of inflation.

UPDATE 1-Fed’s Lacker says bailout issues not yet resolved