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Federal Reserve Bank of New York President William Dudley said the powers the central bank can use to step in and aid a faltering financial institution are still flawed, more than seven years after the crisis, and that allowing more firms access to the discount window "might be worth exploring."

In a speech Sunday kicking off the Atlanta Fed's annual conference on financial markets in Amelia Island, Fla., Mr. Dudley said global regulators were focused on plugging gaps in those mechanisms, known as lender-of-last resort powers, but more work was needed.

"In my view, an important issue is to identify and address gaps in the lender-of-last-resort function," he said. "In the U.S., some significant gaps remain."

He added, "I am happy to report that the Committee on the Global Financial System—one of the Bank for International Settlements' central bank groups—is engaged in a project to determine what lender-of-last-resort gaps currently exist, focusing, in particular, on those that may create vulnerability in terms of financial stability."

One area he expects the group to focus on heavily, he added, is how those procedures would work in the event a failing firm had several units operating across international borders. In that case, the expectations of the domestic and host countries would need to be properly understood, he said.

In the speech, Mr. Dudley also said regulations crafted since the financial crisis have done much to safeguard the largest lenders in the U.S., but he said more work was needed to study the potential side effects, in particular on the ease of trading.

Now that the rules have made all major securities firms in the U.S. part of bank holding companies subject to routine capital and safety checks, Mr. Dudley said providing these firms with access to the discount window could be a worthwhile addition. Currently, the Fed's discount window is only available to depository institutions, and the law hampers the ability of a bank to pass along discount window funding to its securities unit.

"To me, this is a more reasonable proposition now than it was prior to the crisis, when the major dealers weren't subject to those safeguards," he said.

Overall, Mr. Dudley said in the speech, market liquidity—or the ability to transact securities easily in large sizes and at reasonable sizes and costs—has worsened in some ways since the financial crisis, but may have actually improved in others.

He said it isn't clear that rules have been the most important driver behind those shifts, but acknowledged that the rules had played a role. Existing studies on the changes, he said, were insufficient because the metrics available so far "don't tell the whole story."

"While increases in regulatory requirements have undoubtedly played a role, I think that other nonregulatory factors are also important," he said.

Write to Katy Burne at katy.burne@wsj.com

(END) Dow Jones Newswires

May 01, 2016 20:45 ET (00:45 GMT)

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