Federal Reserve Vice Chairman Donald Kohn said Thursday the risks to policy holders and the broad economy are too great for the government not to prevent insurance company American International Group Inc from failing.

"The risks and potential costs to consumers, municipalities, small businesses and others … as well as the risks to the wider economy, of not providing this assistance during the current economic environment are unacceptably large," Kohn said in remarks prepared for delivery to the Senate Banking Committee.

Kohn told the panel that disorderly failure of systemically important financial institutions during the current period of economic stress would deepen the recession, which is already one of most severe in more than 20 years.

He also said that recent economic strains have made it difficult to sell off parts of AIG to repay the government for earlier financial support, which began in September.