Federal Reserve Bank of New York President William C. Dudley said the “unusually anemic” U.S. economic recovery from the credit crisis highlights the need for a regulatory overhaul to ensure financial stability.
“We must keep pushing this agenda forward and not be deterred by those that defend the status quo,” Dudley, 58, said today in a speech in Washington. “The extraordinarily poor economic outcomes we see today underscore the importance of building a financial system that is resilient in its ability to provide credit to households and business throughout the business cycle.”
The policy-making Federal Open Market Committee this week decided to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and counter rising risks of a recession. The so-called Operation Twist drew three dissents as Chairman Ben S. Bernanke struggled to find consensus to help an economy plagued by 9.1 percent unemployment.
“A stable financial system is a prerequisite for sustainable economic growth,” Dudley said. “We need to continue to look to implement changes in systems and practices that will help dampen the pro-cyclicality of the system, and temper the amplitude of both booms and busts.”
Treasuries Fell
Stocks in the U.S. gained and Treasuries fell amid speculation policy makers will act to prevent the European debt crisis from worsening. The Standard & Poor’s 500 Index rose 0.4 percent to 1,133.66 at 3:17 p.m. in New York, and 10-year Treasury yields increased 10 basis points to 1.82 percent.
Dudley is a U.S. representative on the Basel Committee on Banking Supervision, a group of regulators and central bankers from 27 nations that released rules last year requiring banks to bolster capital and reduce borrowing. The Fed is now writing its own rules to reconcile the Basel mandates with requirements under the Dodd-Frank financial overhaul legislation passed last year.
Regulators have “made a good start, but there is a long ways to go,” including improving cross-border coordination, Dudley said.
“Without a level playing field what will happen is the whole dialogue will shift,” Dudley said in response to audience questions after his speech. Some regulators may focus on what’s best for their institutions instead of overall financial stability, he said. “You will have a race to the bottom.”
U.S. bank regulators also need access to “consolidated global balance-sheet information of the foreign banks that operate” in the U.S. to better assess their risk, he said.
‘Signs of Distress’
Steps to boost liquidity have also “not progressed as far as desired,” Dudley said. “Many banks remain dependent on short-term funding to finance longer-term assets from counterparties that tend to flee at the first signs of distress,” Dudley said. Money market funds are especially “vulnerable to runs,” he said.
Additional measures must also be taken to address flaws in the market for tri-party repurchase agreements, such as “inadequate risk management practices and lack of resiliency to a dealer default,” Dudley said.
“Experience suggests that it is not easy for market participants to agree on measures that enhance financial stability when this goal conflicts with the commercial and business interests,” he said.
In a tri-party arrangement, a third party acts as the agent for the transaction and holds the security as collateral.
‘Smart Solutions’
Private companies also have “responsibilities” in ensuring financial stability, Dudley said.
“Banking leaders and industry trade groups should propose smart solutions to achieve essential financial stability objectives and not simply lobby against change,” Dudley said. “More statesmen-like engagement is both warranted and welcome.”
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, who sits on the New York Fed’s board of directors, in June pressed Fed Chairman Ben S. Bernanke in a public forum on whether regulators have gone too far in reining in the U.S. banking system and are slowing growth.
Dudley, who is also vice chairman of the FOMC, didn’t comment on the outlook for the economy or monetary policy. He voted in support of the additional stimulus measure.
The central bank has already purchased $2.3 trillion of debt in two rounds of so-called quantitative easing and has kept its target interest rate near zero since December 2008. In August, it pledged to hold the rate there through at least mid- 2013.
Source: www.bloomberg.com
“We must keep pushing this agenda forward and not be deterred by those that defend the status quo,” Dudley, 58, said today in a speech in Washington. “The extraordinarily poor economic outcomes we see today underscore the importance of building a financial system that is resilient in its ability to provide credit to households and business throughout the business cycle.”
The policy-making Federal Open Market Committee this week decided to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and counter rising risks of a recession. The so-called Operation Twist drew three dissents as Chairman Ben S. Bernanke struggled to find consensus to help an economy plagued by 9.1 percent unemployment.
“A stable financial system is a prerequisite for sustainable economic growth,” Dudley said. “We need to continue to look to implement changes in systems and practices that will help dampen the pro-cyclicality of the system, and temper the amplitude of both booms and busts.”
Treasuries Fell
Stocks in the U.S. gained and Treasuries fell amid speculation policy makers will act to prevent the European debt crisis from worsening. The Standard & Poor’s 500 Index rose 0.4 percent to 1,133.66 at 3:17 p.m. in New York, and 10-year Treasury yields increased 10 basis points to 1.82 percent.
Dudley is a U.S. representative on the Basel Committee on Banking Supervision, a group of regulators and central bankers from 27 nations that released rules last year requiring banks to bolster capital and reduce borrowing. The Fed is now writing its own rules to reconcile the Basel mandates with requirements under the Dodd-Frank financial overhaul legislation passed last year.
Regulators have “made a good start, but there is a long ways to go,” including improving cross-border coordination, Dudley said.
“Without a level playing field what will happen is the whole dialogue will shift,” Dudley said in response to audience questions after his speech. Some regulators may focus on what’s best for their institutions instead of overall financial stability, he said. “You will have a race to the bottom.”
U.S. bank regulators also need access to “consolidated global balance-sheet information of the foreign banks that operate” in the U.S. to better assess their risk, he said.
‘Signs of Distress’
Steps to boost liquidity have also “not progressed as far as desired,” Dudley said. “Many banks remain dependent on short-term funding to finance longer-term assets from counterparties that tend to flee at the first signs of distress,” Dudley said. Money market funds are especially “vulnerable to runs,” he said.
Additional measures must also be taken to address flaws in the market for tri-party repurchase agreements, such as “inadequate risk management practices and lack of resiliency to a dealer default,” Dudley said.
“Experience suggests that it is not easy for market participants to agree on measures that enhance financial stability when this goal conflicts with the commercial and business interests,” he said.
In a tri-party arrangement, a third party acts as the agent for the transaction and holds the security as collateral.
‘Smart Solutions’
Private companies also have “responsibilities” in ensuring financial stability, Dudley said.
“Banking leaders and industry trade groups should propose smart solutions to achieve essential financial stability objectives and not simply lobby against change,” Dudley said. “More statesmen-like engagement is both warranted and welcome.”
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, who sits on the New York Fed’s board of directors, in June pressed Fed Chairman Ben S. Bernanke in a public forum on whether regulators have gone too far in reining in the U.S. banking system and are slowing growth.
Dudley, who is also vice chairman of the FOMC, didn’t comment on the outlook for the economy or monetary policy. He voted in support of the additional stimulus measure.
The central bank has already purchased $2.3 trillion of debt in two rounds of so-called quantitative easing and has kept its target interest rate near zero since December 2008. In August, it pledged to hold the rate there through at least mid- 2013.
Source: www.bloomberg.com
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