The head of the Federal Reserve Bank of Kansas City outlined his suggestions for principles which should guide the resolution process if financial institutions fail.
Bank President Thomas Hoenig made the proposals and provided additional detail during a speech at the Tulsa Metro Chamber of Commerce, according to prepared remarks.
I believe that failure is an option. Those who disagree with my resolution proposal say that it is unworkable, he said as he began to describe the process.
Firms must be allowed to fail based on a predefined set of rules and principles that market participants can rely on when determining their strategies and decisions, he added.
His proposed principles are:
1) Determine if losses large enough to threaten the solvency of the financial institution.
2) When a firm fails, the resolution process should not cause significant disruptions to markets, aiming for lowest cost to do so.
3) Banks, regardless of size, should go through the same resolution process to avoid creating an incentive for banks to take on too much risk in order to become large enough to gain favorable treatment.
4)Base resolution on what works and what doesn't, looking at previous crises around the world.
The entire presentation is located on the Kansas Federal Reserve Bank's web site here.