Fed Vice Chairman Comments on Financial Intermediation and the Post-Crisis Financial System

This story appeared in Bank Digest.

In remarks delivered at the Eighth BIS Annual Conference 2009, Financial System and Macroeconomic Resilience: Revisited, Basel Switzerland, Federal Reserve Board Vice Chairman Donald L. Kohn noted that the root cause of the economic crisis was the underpricing of risk as the financial sector interacted with nonfinancial sectors. Kohn also noted that proposals that require financial intermediaries along the lending chain to maintain “more skin in the game” are worth considering, but that approach is not a panacea. He noted that many institutions that had skin in the game got into trouble anyway. Kohn added it may be impossible to police whether an institution has chosen to keep its own skin in the game or whether its risk has been mitigated through hedging. In the end, no one can police the market better than the final investors, provided the instruments are simpler and more transparent.     http://www.federalreserve.gov/newsevents/speech/kohn20090710a.htm