A Government Accountability Office report released Thursday questioned regulators' use of the "systemic-risk" exception during the financial crisis to create a host of government programs to assist large financial institutions.
The agency said use of the exception has furthered the perception that some institutions are "too big to fail."
"Regulators' use of the systemic-risk exception may weaken market participants' incentives to properly manage risk if they come to expect similar emergency action in the future," the GAO said.
The agency said that legislation to create a way for the government to conduct an orderly wind down of a large financial company could resolve the problem.
"A credible resolution regime could help impose greater market discipline," the GAO said.
The exception, which requires the approval of the Federal Deposit Insurance Corp., Federal Reserve Board, Treasury secretary and president, was invoked five times during the crisis.
The GAO doubted the legal basis for the FDIC invoking the exception to create the Temporary Liquidity Guarantee Program, which provided broad-based assistance to institutions.
This story has been reprinted with permission from American Banker.
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