New regulations designed to curtail risky banking practices may not be popular and could come with additional costs, but they are necessary to correct adverse incentives and moral hazards in the marketplace, said Sarah Bloom-Raskin, a member of the Federal Reserve Board of Governors.
Raskin said if the costs of regulating certain risky institutions become unbearable, the nation may want to reconsider whether those firms should be supported at all.
Raskin made those statements while speaking at the University of Colorado Graduate School of Banking in Boulder. Raskin told the crowd regulators are challenged with ensuring that the banking sector is productive, but also regulated appropriately so low-model banking models – or models that stress short-term profits and avoid risk assessments – are not in a position to pursue excessive risk while putting taxpayers on the hook through massive bailouts.
Raskin said the point of regulation is to support the notion of maintaining high-road business models – or banking models that focus on the larger role they play in the stability of the American economy.
"The high-road business model embodies a public and economic imperative that unifies and animates your banking cultures and decisions," said Bloom-Raskin. "Indeed, the high-road business model of a bank allows you to continually challenge the model with the question: Does this banking model interfere with a notion of public welfare and economic common good? Or advance it?"
Raskin noted that new regulations may not be popular, but she believes if crafted appropriately, they can alter the negative actions of banks that may be inclined to take the excessive-risk, short-term results model.
"In my view, though, the regulation of low-road banking models is not without cost. Indeed, some banking models are so complicated that they cannot be regulated without the expenditure of significant public or private dollars," Raskin said. "When these business models have such a distant connection to meaningful financial intermediation, I believe that we as a society may very well want to rethink whether we want to support these business models at all. The costs of supporting them, simply put, may be prohibitive."