Gary Stern, the Federal Reserve's longest-serving regional president and a vocal critic of big bank bailouts, will retire in the summer of 2009, the Minneapolis Fed said on Thursday.
Stern, 64, has made his battle cry the issue of too big to fail, or the problems created when massive banks or financial institutions are given preferential treatment because of their sheer size or perceived systemic risk.
It has been truly an honor to spend most of my career working at the Federal Reserve Bank of Minneapolis, Stern said in a statement released by the regional bank.
Stern has led the bank since 1985.
James Hynes, chairman of the Minneapolis Fed's board of directors and executive administrator, will head a committee to conduct a search for Stern's replacement.
Recent buzz within the central bank has been that Christine Cumming, first vice president of the New York Fed, is the front runner to replace Stern as the head of the Fed's Ninth District.
Cumming, 56, was born in Minneapolis. She earned her B.S. and Ph.D. in economics from the University of Minnesota. She joined the Fed in 1979 as an economist in the international research department
She is an alternate voting member of the Federal Open Market Committee and was seen as a short-listed contender for the top New York Fed job ultimately given to William Dudley in January.
Dudley replaced Timothy Geithner, who is now President Obama's Treasury secretary.
If appointed, Cumming would increase to three the number of current female regional Fed presidents, serving alongside Cleveland's Sandra Pianalto and San Francisco's Janet Yellen.
While Stern tended to be on the hawkish side, he does not have a record of dissent, so unless his replacement is outspoken, the market implications are modest, said strategists at 4CAST Ltd in New York.
'TOO BIG TO FAIL' GAINS CURRENCY
The Minneapolis central bank did not give an exact date for Stern's departure. Under Fed rules, his mandatory retirement date would be November 3, his 65th birthday.
We have faced considerable challenges over this time, and certainly today's financial and economic environment has been the most difficult, Stern said.
I am confident that with the chairman's (Ben Bernanke) leadership, along with other outstanding policy-makers in the Federal Reserve, our financial system will fully stabilize and our economy will once again resume growth, Stern said.
Stern and Minneapolis Fed economist Ronald Feldman published Too Big to Fail: The Hazard of Bank Bailouts in 2004. The book examined the way moral hazard is created when policy-makers shield bank creditors from losses they would face when mega-banks and other financial institutions are deemed too big or too systemically important to be allowed to fold.
The financial crisis that erupted in 2007 gave new legs to the too big to fail issue, which has provided fodder for a number of Stern's speeches and papers since then.
The book argues that protection of uninsured creditors of systemically important financial institutions leads to underpricing of risk and, therefore, excessive risk-taking, which in turn sets the stage for turmoil in financial markets and disruption in the economy.
Speaking in Minneapolis last week, Stern seemed vindicated.
If policy-makers had focused on our recommendations, we would at a minimum have been better prepared to address the problems that have arisen over the last 20 months, he told the Economic Club of Minnesota.
Recently Stern has proposed a program of systematic focused supervision designed to minimize the potential spillover effect of large institutional failures.
(Additional reporting by Melissa Bland and Mark Felsenthal in Washington; Editing by Jan Paschal)