Fed's Kocherlakota Says Largest Banks Threaten Stability

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said banks deemed “too big to fail” pose a significant risk to financial stability, while noting their threat has waned in recent years.

“The size of the TBTF problem has fallen over the past couple of years but remains large,” Kocherlakota said today in the text of prepared remarks given in Boston.

More than four years after the collapse of Lehman Brothers Holdings Inc., U.S. regulators are still grappling with how to reduce the risk taxpayers will need to bail out too-big-to-fail financial firms in a crisis. Kocherlakota stressed the need to develop a way to measure the problem, saying current approaches are inadequate.

“How will we know if these changes in laws and regulations are working?” Kocherlakota said at a conference at the Boston Fed, referring to the overhaul required under the Dodd-Frank Act. “There is no way to answer this question without a measure -- or preferably a range of measures -- of the size of the TBTF problem.”

The Minneapolis Fed chief didn’t comment on his outlook for the economy or monetary policy. He is not a voting member of the policy-setting Federal Open Market Committee this year.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net.

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

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