N.Y. Fed Chief Calls for More Fed Authority

The president Federal Reserve Bank of New York, Timothy Geithner, called for greater central bank authority over banks so the financial system can better withstand shocks and recover from the credit crisis.In addition, the Fed’s lending programs to commercial and investment banks will remain “until conditions in money and credit markets have improved substantially,” Mr. Geithner wrote in an op-ed article for the Financial Times. His remarks were excerpted and adapted from a speech to be delivered yesterday in New York.Officials are searching for ways to prevent a repeat of the decline in credit, sparked by the subprime-mortgage bust, that’s cost banks $389 billion in writedowns worldwide and led the Fed to rescue Bear Stearns Cos. from bankruptcy in March. Mr. Geithner’s comments build on congressional testimony he gave in April.“It is important that we move quickly to adapt the regulatory system to address the vulnerabilities exposed by this financial crisis,” Mr. Geithner said. Officials must be careful not to write rules that “make things worse” and “distort incentives in ways that may make the system less safe.”Mr. Geithner cited a March plan by Treasury Secretary Henry Paulson as providing a “sweeping consolidation and realignment of responsibilities.”The remarks contrast with a speech last week from the president Richmond Fed, Jeffrey Lacker, who warned that lending to securities firms raises the risk of future tumult. Separately, the head of the Philadelphia Fed bank, Charles Plosser, said last week that the Fed should set rules for providing emergency funding to financial institutions.Mr. Geithner said in the Financial Times that “at present the Fed has broad responsibility for financial stability not matched by direct authority and the consequences of the actions we have taken in this crisis make it more important that we close that gap.”The Fed created the Term Auction Facility in December, which now offers $75 billion in loans to commercial banks in biweekly sales. In March, the central bank started the Term Securities Lending Facility, run by the New York Fed, to auction as much as $200 billion of Treasuries to the 20 primary dealers who trade with the Fed.Then, also in March, as Mr. Geithner and the Fed moved to rescue Bear Stearns and engineer its sale to JPMorgan Chase & Co., the central bank established the Primary Dealer Credit Facility to lend to investment banks at the same discount rate charged to commercial banks. The rate is now 2.25%.“We are examining what framework of facilities will be appropriate in the future, with what conditions for access and what oversight requirements to mitigate moral hazard risk,” Mr. Geithner said. “Some of these could become a permanent part of our instruments. Some might be best reserved for the type of acute market illiquidity experienced in this crisis.”

N.Y. Fed Chief Calls for More Fed Authority

N.Y. Fed Chief Calls for More Fed Authority

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