Fed’s Evans: Investors still expect bailouts

By Dow Jones Newswires
Posted Friday at 10:20 a.m.

Federal Reserve Bank of Chicago President Charles Evans on Friday said investors may still expect ailing financial institutions to be bailed out by governments despite reforms aimed at reversing market psychology.

“They need to come to the belief that future financial workouts will occur without special assistance from the government,” Evans said in the text of a speech delivered at a conference in New York. “To date, though, I haven’t seen very strong evidence that these investors get the message.”

Evans focused on the framework of reform measures rather than monetary policy in his remarks, though said “huge resource gaps” in the economy have yet to close in the wake of the last recession.

He also said the rise in equities over the past two years, narrowing junk bond spreads and the return of covenant light or “cov-lite” loans were not evidence of an emerging asset bubble, and called on policy makers to retain their existing focus on targeting employment and inflation.

Evans, a member of the rate-setting Federal Open Market Committee, said the pursuit of the Fed’s so-called dual mandate of promoting employment and maintaining price stability should not be compromised with an additional mandate to tackle asset bubbles.

Market discipline and the need for prudential regulation are crucial lessons to be learned by policy makers from the last recession, said Evans.

“Additional safeguards are necessary, and the best of such safeguards are simple regulatory principles that require minimal discretion in their real-time execution,” he said.

Evans said he favored “substantial minimum capital requirements” for banks, together with other nondiscretionary measures.

“I favor simple minimum-liquidity requirements to limit the degree to which long-term assets can be financed with short-term liabilities,” he said, with central clearing of “most” over-the-counter derivatives and “minimum collateral” requirements for the rest.


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