Volcker sees markets more fragile without reforms

WASHINGTON (BestGrowthStock) – Failure to enact financial reforms to curb large banks’ risky activities and allow them to fail without broad market disruptions will make the financial system even more fragile in the future, Obama administration adviser Paul Volcker said on Sunday.

In an opinion piece written for The New York Times, Volcker, a former Federal Reserve chairman, said the United States needs better protection against “outliers” — a limited number of mega-institutions whose failure would be “disturbing” to markets.

“The implication is clear. We need to face up to needed structural changes, and place them into law,” Volcker wrote. “To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.”

Volcker wrote that during his 60-year career as a banker, regulator and central banker, he has seen “memories dim” after crises, and noted that there will be pressures to “lay off” tough regulatory changes.

In the most recent crisis, bailout efforts that saved several large institutions from collapse left a “residue of moral hazard,” Volcker wrote, implying that “really large, complex and highly interconnected financial institutions can count on public support at critical times.”

The bailouts have given these firms a competitive advantage in their financing, in their size and in their ability to take and absorb risks.

“As things stand, the consequence will be to enhance incentives to risk-taking and leverage, with the implication of an even more fragile financial system. We need to find more effective fail-safe arrangements.”

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(Reporting by David Lawder, editing by Martin Golan)

Volcker sees markets more fragile without reforms