Friday, May 30, 2008

Kohn Signals Wall Street May Get Permanent Access to Fed Loans

He is at odds on this issue with his boss, at least for now:

The Federal Reserve should return to adjusting reserves mainly through purchases and sales of the safest and most liquid assets as soon as that would be consistent with stable, well-functioning markets. In fact, several of the Federal Reserve's new programs are designed to be self-liquidating as markets improve.

The public authorities need to consider several difficult issues with respect to access to the discount window. One is the circumstances under which broker-dealers should be permitted to borrow in the future. One possibility would be to confine such borrowing to circumstances in which the Federal Reserve judges that the stability of the financial system is at risk--as we did in March. Another would be to grant broker-dealers the same sort of regular access enjoyed by commercial banks.

Unquestionably, regulation needs to respond to what we have learned about the importance of primary dealers and their vulnerabilities to liquidity pressures. We need to confront the difficult questions I raised earlier about the scenarios in which it is appropriate to rely on central bank liquidity and the scenarios in which such reliance is inappropriate. And we need to ensure that supervisory guidance regarding liquidity risk management is consistent with the way we answer those questions. Whether broader regulatory changes for broker-dealers are necessary is a difficult question that deserves further study.

source: Vice Chairman Donald L. Kohn
At the Federal Reserve Bank of New York and Columbia Business School Conference on the Role of Money Markets, New York, New York, May 29, 2008

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