Jim Bullard

English

Research Papers in Economics

A similar system is not in place for large 
bank and nonbank financial institutions.  
Large institutions are much more complex 
and difficult to monitor.  Many, if not all,  
of these institutions are global enterprises.
Assessing the financial well-being of the 
organization as a whole is challenging, espe-
cially because no regulator is responsible for 
monitoring the entire entity.  This can lead 
to the sudden revelation of problems and, 
consequently, market disruption.
Just as an effective monitoring system is 
needed for these large banks and nonbanks, 
so is a clear and credible resolution regime.  
One possibility is to incorporate special con-
siderations for financial institutions into the 
bankruptcy code, clarifying the process and 
accelerating it.  Quick and clear resolution 
would avoid market disruptions.
2
As the need for reform in the financial 
services industry has been debated, there 
has been talk about creating a systemic risk 
regulator.  The Fed has long been playing  
this role on a de facto basis, given that it 
is the lender of last resort and controls 
monetary policy.  The Fed also has a long 
history of bringing suspected risk issues to 
James Bullard, President and CEO
Federal Reserve Bank of St. Louis
H
istorically, crises have led to significant 
legislation.  For example, the panic of 
1907 led to the Federal Reserve Act of 1913, 
which established the Federal Reserve as the 
central bank.  Out of the Great Depression 
came the Glass-Steagall Act, which estab-
lished the Federal Deposit Insurance Corp. 
and separated commercial from invest-
ment banking.  The thrift crisis in the late 
1980s led to the enactment of the Federal 
Deposit Insurance Corp. Improvement Act 
(FDICIA) of 1991, which mandated prompt 
resolution of failing banks and new stan-
dards for bank supervision, regulation and 
capital requirements.  The collapse of Enron 
and WorldCom gave rise to Sarbanes-Oxley 
in 2002, in an effort to improve the accuracy 
and reliability of corporate disclosures.
1  
The current financial crisis will undoubt-
edly spur further regulation.  Successful 
regulation should be aimed not at prevent-
ing all failures, but rather at establishing 
a clear and credible process such that if a 
failure were to occur, it would take place in 
an orderly fashion and not cause industry-
wide panic.
Portions of the regulatory system cur-
rently in place work well.  Smaller-bank 
regulation, for example, was successful 
during the thrift crisis and during the cur-
rent crisis.  Key components of small-bank 
regulation are deposit insurance—which 
assures depositors that they will not lose 
their money—and prudential regulation 
—which prevents bankers from abusing 
deposit insurance.  Good monitoring and 
rating systems are in place, allowing regula-
tors to identify, in a timely way, banks that 
are on the verge of failing and to prepare for 
those failures accordingly.  Should a bank 
fail, there are clear rules and organized pro-
cedures in place; everyone knows and under-
stands what these rules and procedures are.
As in the Past, Reform Will Follow Crisis
P R E S i d E n t ’ S   m E S S a g E
the forefront.  My predecessor, Bill Poole, 
sounded the alarm on Fannie Mae and 
Freddie Mac in this space nearly seven years 
ago.
3  The late Fed Gov. Ned Gramlich took 
his case against predatory lending to Alan 
Greenspan in 2000.  Minneapolis Fed Presi-
dent Gary Stern has been leading the charge 
against “too big to fail” for years.
Whether a new systemic regulator is 
needed, along with who would fill that role, 
is one of just many regulatory issues that 
need to be decided.  So far, the discussion 
has been broad.  Now, it’s time to narrow the 
focus and act. 
“Just as an effective monitor-
ing system is needed for 
these large banks and 
nonbanks, so is a clear and 
credible resolution regime.”
E N DNO T E S
  1  See the FDIC’s web site for a compilation of banking leg-
islation since the 1880s.  Go to www.fdic.gov/regulations/
laws/important/index.html.
  2  See “Insolvency of Systemically Significant Companies: 
Bankruptcy vs. Conservatorship/Receivership,” Congres-
sional Research Service Report for Congress R40530, April 
20, 2009.  See http://opencrs.com/document/R40530/.
  3  Federal Reserve Bank of St. Louis The Regional Economist, 
October 2002, Vol. 10, No. 4, p. 3.
The Regional Economist  |  www.stlouisfed.org   3

As in the past, reform will follow crisis

http://stlouisfed.org/publications/re/2009/c/pdf/pres_mes.pdf

As in the past, reform will follow crisis

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Research Papers in Economics