Speaking on 'Money Markets and Financial Stability' at the New York Fed's conference on money markets on Thursday night, Fed Vice-Chairman Donald Kohn (voter) said it was unclear how much strengthening of the U.S. financial regulatory system was needed, but that the need for reforms was evident.
"As I noted at the outset, one important lesson from recent developments is that we need to devote greater attention to money markets," Kohn said in his closing remarks. "Disruptions to those critical markets have the potential to significantly harm the financial system and the real economy."
Kohn said making loans to primary dealers permanent was a difficult decision, but that it was possible for the new auction systems to be kept after the financial crisis eased.
"Unquestionably, regulation needs to respond to what we have learned about the importance of primary dealers and their vulnerabilities to liquidity pressures," he said. "We need to confront the difficult questions I raised earlier about the scenarios in which it is appropriate to rely on central bank liquidity and the scenarios in which such reliance is inappropriate."
He made no comments on monetary policy or the economy.
By Erik Kevin Franco and edited by Nancy Girgis