By Steven K. Beckner

CHATHAM, Ma (MNI) - Federal Reserve Vice Chairman Donald Kohn said Thursday that the government policy of considering some financial institutions "too big to fail" is a serious problem in need of solution, but said it did not cause the financial crisis.

Kohn, making an unscheduled comment during a Boston Federal Reserve Bank conference, also expressed his discomfort with the major role the Fed has played in providing liquidity to financial institutions during the breakdown of inter-bank funding markets.

Kohn's comments came after an extensive morning discussion among conference participants which focused on the key role which the "too big to fail" doctrine played in propagating the financial crisis.

In a question and answer session, Kohn intervened to object that people were talking about "too-big-to-fail" as if it had caused the crisis.

"It is a huge problem," he said, "and solving it is necessary, but we got there because of a bunch of other issues."

Solving the too-big-to-fail problem is "not the only thing we need to do," he continued. "We got there because neither public nor private agencies were managing risk" properly.

Problems in the inter-bank market were "a source of contagion for sure but that was almost a symptom," Kohn said, adding that financial institutions "ran away" from the asset-backed securities market.

"I am also very concerned about the central bank standing in the middle of all these counterparties," said Kohn. "We substituted our lending for interbank lending."

** Market News International **