NY Fed president: Crisis can teach finance system

The president and CEO of the Federal Reserve Bank of New York said Friday that the financial world can learn from the economic crunch of the past two years and become stronger.

William Dudley, who was named president of the key bank in January when predecessor Timothy Geithner became treasury secretary, spoke at a symposium at Princeton University's Center for Economic Policy Studies on Friday.

"Our goal must be to make the financial system more resilient to shocks," he said. "If we can do that successfully, we should be able to reduce the risk of financial crises."

Dudley said the financial crisis deepened quickly partly because of its reliance on funding from the so-called shadow banking system of hedge funds and other lightly regulated financial entities, which turned out to be more fragile than expected.

Those funds stopped making loans for two main reasons, he said.

One is that the firms that needed money may have been insolvent.

The second, he said, is more complicated. Even when a lender believes a firm to be solvent, it might not lend it money out of fear that others won't help it.

Dudley said there's no "magic bullet" to fix problems like these, but there are a number of steps that could help.

He suggested regulatory measures, such as requiring financial intermediaries to hold more capital, and making central banks such as the Federal Reserve the lenders of last resort to solvent firms that have trouble getting credit elsewhere.

He says some of the solutions are already being implemented.

The Basel Committee, an international forum to coordinate banking supervision, is working on requiring more reserves for large and complicated financial institutions, he said.

Also, Dudley said, securities dealers in the United States are now subject to regulation by the Federal Reserve.

Dudley said the steps that are already being taken can dramatically reduce the risk of a future financial crisis if they are implemented fully.