UPDATE 1-Lacker proposes banning Fed loans to non-banks

(Adds details, background)

By Pedro Nicolaci da Costa

WASHINGTON, March 1 (BestGrowthStock) – Richmond Federal Reserve
Bank President Jeffrey Lacker on Monday proposed abolishing the
authority of the U.S. central bank to lend to non-bank firms,
which he said would help re-establish market discipline.

“I and several others have suggested limiting the Fed’s
ability to engage in extraordinary credit measures,” Lacker
said in prepared remarks at a breakfast sponsored by the
Institute for International Bankers.

“Such limits might include abolishing the so-called 13(3)
provisions that allow the Fed to lend to entities outside of
banking institutions with regular access to the discount
window,” he said.

His comments come as Congress discusses ways to reform
financial regulation following the most severe financial crisis
in generations. Bailouts of large investment conglomerates like
Bear Stearns and AIG have been particularly unpopular, sparking
calls for a new regulatory authority to wind down large
financial institutions in an orderly fashion.

Lacker argued such intervention has strengthened investor
perceptions that big firms will never be allowed to go under.
He said changing this view was much more important than
determining which particular regulator has authority over what
sliver of the financial system.

“Compared to the real reform of clarifying the scope of the
financial safety net, optimizing the number or organization of
regulators strikes me as a second- or third-order problem at
best,” Lacker said. “And proposals to materially alter the
Federal Reserve’s supervisory responsibilities strike me as
misguided.”

Certain proposals in the Senate have envisioned stripping
the Fed of its regulatory role following what many saw as
critical failures of supervision leading up to the crisis. Such
an outcome appeared increasingly less likely, however.

Chrisopther Dodd, the U.S. Senate’s chief architect of
financial regulation reform, said on Friday the Federal Reserve
may “not necessarily” lose its authority to supervise banks,
signaling a potential shift in his thinking.

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(Reporting by Pedro Nicolaci da Costa, Editing by Chizu
Nomiyama)

UPDATE 1-Lacker proposes banning Fed loans to non-banks