U.S. banks are likely to cut back on risky short-term funding if markets believe bankruptcy not bailouts await them, a top Federal Reserve official is set to tell lawmakers on Tuesday.
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, is expected to tell Congress that the biggest U.S. banks have relied on raising short-term cash because they have expected the government to step in if their strategies failed.
"In the absence of that expectation, firms and their creditors would have strong incentives to reduce reliance on fragile short-term funding,'' Lacker said in a statement prepared for a House committee hearing.
(Read more: Fed's Tarullo details plans to counter bank runs)
Fed officials have identified short-term funding as a funding method that fueled the 2007-2009 financial crisis and a continuing threat to the financial system.
The 2010 Dodd-Frank law requires firms such as JPMorgan Chase, Goldman Sachs and Citigroup to draw up so-called "living wills,'' or blueprints for how they could go through bankruptcy without government support.