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Wall Street investment firms shouldn't become dependent on the Federal Reserve's emergency loans as a permanent source of funding, Assistant U.S. Treasury Secretary Anthony Ryan said.

“When they put these lending facilities in place back in March, they said they were going to be temporary,'' Ryan said today in a Bloomberg Television interview in London. “We don't want to encourage the dependence upon the Federal Reserve as a backstop.'' He added later in a speech that financial institutions should be “allowed to fail.''

The Treasury, Fed and other agencies are discussing ways to overhaul regulation of the U.S. financial system to improve risk management and disclosure. Ryan said it is up to the Fed to decide when to change the availability of the credit lending facility made available three months ago to the primary dealers of government bonds.

“What we really want to do is to strengthen market discipline and ensure that our financial institutions remain well capitalized,'' he said.

U.S. regulators are working out how to let investment banks retain access to the so-called Primary Dealer Credit Facility once the program is shut down in September, a government official said last week on condition of anonymity. The Treasury and the Securities and Exchange Commission are seeking to ensure the emergency measures are temporary.

Bear Stearns Rescue

The Fed introduced the facility March 16, the same day it agreed to lend against $30 billion of collateral from Bear Stearns Cos. to secure its takeover by JPMorgan Chase & Co. Firms can borrow at the same rate as commercial banks, which are already subject to capital rules and direct Fed oversight.

Fed officials have examiners inside investment banks to help assess the credit risk they are taking on loans. The SEC and the Fed are working on a memorandum of understanding that should formalize agreements on information sharing.

Regulators are seeking to alleviate the impact from the collapse of the subprime mortgage market and prevent a recurrence of a disruption that has led to global writedowns of $400 billion bad credit payday loans no fax payday loans. Ryan said that while “we've made a lot of progress,'' improvement wouldn't come “in a straight line.''

In a speech after the interview, Ryan said that as regulators seek to improve market discipline, they must also allow for the possibility that some institutions will go bankrupt.

`Allowed to Fail'

“As we resolve the challenges of today, federal regulators must balance the need for market stability with concerns about the likelihood of increased moral hazard,'' he said to Euromoney's Global Borrowers Investors Forum, according to a text. “While firm failures are painful, as a policy matter, we must be in a place where firms are allowed to fail.''

The Treasury official said a breakdown in risk management from financial firms, credit agencies and investors all contributed to the turmoil that is now easing.

“As the fog enveloping our markets continues to dissipate, we must all recognize that the erosion of market discipline contributed greatly to the challenges we are addressing today,'' he said. “These breakdowns in the system will continue to occupy policy makers and market participants for years to come.''

There must be changes in credit-rating companies' practices, as well as in the way corporations use those ratings, he said

“The users of their services must rely less on, and appreciate more, the limitations of ratings products,'' he said.

Ryan, a former portfolio manager who took his current post in December 2006, declined to comment in the interview on whether he is a candidate to replace departing Fed Governor Frederic Mishkin.

Two officials familiar with the matter said last month the White House is considering nominating Ryan.

“Replacements to the Federal Reserve Board are up to the president and the Federal Reserve,'' he said. “I'm very busy with my responsibilities.''

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