Boston Federal Reserve President Eric Rosengren says governments around the world need more power to resolve problems facing the major industries and companies affecting their economies.
Rosengren called for the establishment of a systemic regulator to help keep the economic dangers in check.
Events of the past year demonstrated the glaring absence of resolution powers in the United States, except for banks, and demonstrated the limited ability of U.S. authorities to intervene in troubled non-depository financial institutions, Rosengren said in remarks prepared for delivery in Hong Kong on Tuesday.
This state of affairs left the United States lacking the tools to smoothly address the failures of the 'systemically important' institutions - those whose disorderly failure could potentially lead to a drop in confidence in the global banking system, seize-ups in credit markets, the collapse of other financial institutions and worsening economic conditions, he added.
Rosengren told the Institute of Regulation and Risk North Asia that the ability of government's to control the economic threats has not kept pace with global economic growth.
Greater integration of the world economy and financial markets is both desirable and inevitable, he said. However, our ability to manage insolvency risk of key players has not grown with these developments.
The absence of a resolution authority has created a multi-layered threat, Rosengren said, noting that several European countries have experienced sector meltdowns that have shown the U.S. is not alone.
He said the financial system meltdown, and the response to it, has been an enlightening example. Clearly, the role played by financial institutions in the current crisis has laid bare the need to rethink how systemically important financial institutions should be regulated, and if they fail, how they should resolved, Rosengren said.
Rosengren also noted that others, including Federal Reserve Chairman Ben Bernanke, have acknowledged the urgent need to address the lack of resolution authority.
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