Federal Reserve Bank of Philadelphia President Charles Plosser called for the largest financial institutions to hold more capital to help prevent a repeat of the recent financial crisis, and renewed his call for reducing the pace of Fed stimulus.

“The most effective preventive measure to reduce the probability that a financial firm will fail in the first place is adequate capital,” Plosser said, according to prepared remarks for a speech in Chestnut Hill near Boston. “In addition, higher levels of capital may permit regulatory or market intervention before a firm actually fails, thereby making bankruptcy or bailouts unnecessary.”

Charles I. Plosser
Charles I. Plosser

Plosser, did not discuss the outlook for the economy or monetary policy in his prepared remarks. He told reporters after his speech that recent comments from Fed officials show that dialing back the central bank’s $85 billion a month pace of asset purchases “is clearly on the table, either at the next meeting or the subsequent meeting should the economy continue to progress the way it is doing.”

The policy making Federal Open Market Committee next meets on June 18-19. The Philadelphia Fed chief, who doesn’t vote on FOMC policy this year, dissented twice from the committee’s decisions in 2011, opposing moves to add monetary stimulus.

‘Plays Out’

“Different people feel different about that, so we’ll have to see how that plays out,” said Plosser, who did not support the initiation of the third round of quantitative easing, known as QE3, last year. On May 9 he told reporters in New York that he would support reducing the pace of purchases as soon as possible and repeated today that “my preference would be sooner rather than later.”

Plosser said a strategy he’d favor would be “rather than trying to push our balance sheet up at the rate of $85 billion a month, maybe we could only push it up at the rate of 70, or 75, or 65 that is still trying to provide some accommodation, but at a slower pace and begin to sort of wean our way out.”

Plosser devoted his speech today to banking regulation and called for a larger surcharge against systemically important financial institutions. Current proposals for a surcharge of 1 percent to 2.5 percent against such institutions “may simply be too low,” he said.

Capital Rules

The Philadelphia Fed chief was the second policy maker today to weigh in on the need for strong capital requirements. Fed Governor Sarah Bloom Raskin said that regulators should hasten to implement the set of capital and liquidity rules known as Basel III, adopted by the Basel Committee on Banking Supervision, and designed to improve the quality and quantity of regulatory capital.

“We should seek to increase capital buffers for financial institutions and to simplify capital regulation by reducing or eliminating the ever-increasing complexity of risk-weighted capital calculations,” Plosser said in remarks at the Boston College Carroll School of Management.

“Furthermore, if we are to end discretionary bailouts and the associated moral hazard problems that they create, we should seek more rule-like methods to resolve failing firms, such as a new Chapter 14 bankruptcy mechanism,” he said, renewing his call from a May 9 speech to enhance bankruptcy procedures for large financial companies.

Limiting Risk

Fed officials and U.S. lawmakers are considering new ways to limit the risk that the failure of a large bank will lead to a taxpayer-funded rescue. The central bank is discussing ways to limit the safety net and curtail balance-sheet expansion at the largest banks, while senators from both parties are discussing legislation that would tighten capital standards.

House Financial Services Committee Chairman Jeb Hensarling, a Texas Republican, has said he favors a bankruptcy overhaul over the Dodd-Frank Act’s resolution authority.

Senators Sherrod Brown, an Ohio Democrat, and Republican David Vitter of Louisiana announced legislation in April that would impose a 15 percent capital requirement for the largest banks, saying Dodd-Frank won’t prevent future bailouts.

Plosser, 64, became president of the Philadelphia Fed in August 2006. As a regional bank president, he is responsible for carrying out the supervision of banks in his district. Fed regulations are written by the board of governors in Washington.

Editors: Kevin Costelloe, Carlos Torres