By Steven K. Beckner

NEW YORK (MNI) – Philadelphia Federal Reserve Bank President
Charles Plosser said Wednesday that, as written, legislation moving
toward passage in Congress does not come to grips with the so-called
“too big to fail” problem — the dilemma that arises when large
financial firms take excessive risk in the knowledge that the federal
government is not likely to let it go bankrupt.

“I don’t think we’ve got tbtf solved with this legislation,”
Plosser said following a speech at a conference sponsored by the Squam
Lake Group of academic economists and former policymakers.

Plosser continued to press his proposal for a special bankruptcy
court procedure for unwinding insolvent firms, in preference for the
kind of regulatory “resolution mechanism” being advanced in the House
and Senate.

And Plosser said there should be international coordination of the
financial bankruptcy process.

“It’s not going to be an easy task,” he conceded, “but that doesn’t
mean we shouldn’t try.”

“It wouldn’t take a great deal of international coordination,” he
said. “If you just got the U.S. and the UK to harmonize you’ve solved a
great deal of the challenges.”

Achieving an international procedure for handling large bank
bankruptcies is “not insurmountable,” he said. “The sooner we get
started on it the better … . It’s a better solution.”

In other comments, Plosser observed that, with all the discussion
of “excessive leverage” by financial firms, “you don’t hear much
discussion about equalizing the tax treatment of debt and equity.”

He was referring to the deductibility of interest on debt.

“The first thing you could do to discourage leverage would be to
equalize tax treatment,” said Plosser.

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