Keep high bar for credit market intervention: Fed's Powell

Fed Governor Jerome Powell, who did not mention monetary policy, said in a speech that government regulators should be less inclined to disrupt credit markets in the name of safety than in other areas such as money or repurchase markets.

"Unless there is a plausible threat to the core of the system or potential for damaging fire sales, I would set a high bar for supervisory interventions to lean against the credit cycle," Powell told students and professors at New York University.

"Such interventions would almost surely interfere with the traditional function of capital markets in allocating capital to productive uses and dispersing risk to the investors who willingly choose to bear it."

He added that the risk of runs in such markets remains, and that the Fed and other regulators must consider whether leverage and deteriorating credit underwriting is putting the financial system at risk.

In 2013, the Fed and other regulators released guidance designed to limit the size of loans banks made to heavily indebted companies to six times their earnings before interest, tax, depreciation and amortization (EBITDA).

Several big private-equity deals have fallen through or needed to be reworked in recent months as U.S. banks have balked at financing buyouts that exceed those guidelines.

Powell said that some of that risk-taking has moved into institutions that fall outside the regulated banking system, which could create financial instability if those firms do not have reliable sources of funds.

(Reporting by Jonathan Spicer and Peter Rudegeair; Editing by Meredith Mazzilli and Chris Reese)