Federal Reserve Board Governor Jeremy Stein said some progress has been made in removing the perception that financial authorities will bail out failing mega companies.
However, Stein said more needs to be done, such as stronger credit ratings for the largest banks.
"All else equal, this uplift confers a funding subsidy to the largest financial firms," he said.
Stein added, "Even if bailouts were commonly understood to be a zero-probability event, the problem of spillovers remains."
The Fed Governor prefers to lean on Dodd-Frank financial reforms, giving supervisors new authority to resolve issues that pop up at large financial institutions.
"While I agree that we have a long way to go, I believe that the way to get there is not by abandoning the current reform agenda, but rather by sticking to its broad contours and ratcheting up its forcefulness on a number of dimensions," Stein stated.