By Vivien Lou Chen and Sandrine Rastello

Federal Reserve Bank of New York President William Dudley said the central bank could curtail the risk of future liquidity crises by providing a “backstop” to solvent firms with sufficient collateral.

“The central bank could commit to being the lender of last resort” to such firms, Dudley said in a speech yesterday in Princeton, New Jersey. This would reduce “the risk of panics sparked by uncertainty among lenders about what other creditors think.”

Dudley said he’s confident regulators can create policies to reduce the risk of future liquidity runs like the ones that struck Bear Stearns Cos., Lehman Brothers Holdings Inc. and American International Group Inc. The international Basel Committee on Banking Supervision is reviewing ways to require banks to hold more and higher-quality capital, he said.

Continue reading Fed Could Offer ‘Liquidity Backstop’ to Some Firms, Dudley Says