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Lockhart: Regulators Must Work to End Bailouts

Federal Reserve Bank of Atlanta President Dennis Lockhart said regulators haven’t yet put in place a system that would allow orderly failures of the largest financial firms without taxpayer rescues.

“ The system we should work toward is one in which no institution is too big to fail,” Lockhart said today in a speech in Atlanta. “Much is being done in the aftermath of the Fed’s and the Treasury’s emergency interventions of 2008 to get to this state of affairs, but, in my view, this is a longer-term aspiration at this moment.”

The Fed and other banking regulators are working to avoid more taxpayer-funded bailouts following the rescues of insurer American International Group Inc. and Citigroup Inc., which stoked public anger against the central bank and Congress. The Dodd-Frank Act passed last year mandated the Fed to monitor emerging risks to financial stability in the wake of the U.S. recession that ended two years ago.

Lockhart said regulators must raise required levels of capital to protect against failure of the biggest banks.

“Maintaining this buffer is especially important for the larger, systemically-important institutions for which government intervention in a crisis might otherwise be the only response to a threat to the entire system,” Lockhart said in the text of remarks at a panel discussion at Emory University’s Goizueta Business School. “We absolutely must get to a state in which private shareholders and creditors bear the risks of failure, not taxpayers.”

Economic, Monetary

Lockhart didn’t comment on the U.S. economic outlook or monetary policy in his prepared remarks. Chairman Ben S. Bernanke told Congress this week the Fed could take further action to aid a recovery that’s “close to faltering” with unemployment at or above 9 percent since April.

Employers added 103,000 workers last month, more than forecast by economists, and the jobless rate held at 9.1 percent, Labor Department figures showed today. Revisions to previous reports added a total of 99,000 jobs to payrolls in July and August.

Fed policy makers voted Sept. 21 to adopt a program to push down mortgage and other loan rates in an effort to spur growth and employment. The Fed plans to extend maturities of the Treasuries in its portfolio by buying $400 billion of long-term debt and selling an equal amount of shorter-term securities.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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