By Steven K. Beckner and Claudia Hirsch
NEW YORK CITY (MNI) – St. Louis Federal Reserve Bank President
James Bullard looked askance at proposed financial regulatory reforms,
warning that few of them would prevent future crises.
Bullard, in remarks to a conference sponsored by the Levy Economics
Institute, stressed the need for the Fed to have “broad” regulatory
authority, including a continued hand in the supervision of smaller
banks, if it is to play its “lender of last resort” role effectively in
future crises.
He warned that restricting the Fed’s emergency Section 13(3)
authority to lend to a broad range of firms in “unusual and exigent”
circumstances would “hamstring” the Fed and “exacerbate” future crises.
Bullard also expressed skepticism whether a proposed “systemic
risk” council of regulators, a proposed “resolution” regime and a
proposed financial consumer protection agency would do much to prevent
future crises.
“How can we prevent an entire industry from adopting the same
strategy?” he asked. “I do not see this being addressed in current
proposals.”
Bullard said the Fed had only a “limited view of the financial
landscape,” since 20 firms accounted for 80% of total financial sector
assets, and only a third of those assets were held by commercial banks.
The other two-thirds were held in the so-called “shadow banking system,”
including government sponsored enterprises, investment banks, insurance
companies and others.
He said the Fed had primary regulatory responsibility for about 12%
of banks and had only “severely limited information” on the “most
troublesome entities” in the “shadow banking system.”
Without the right kind of reforms, he said, the nation will “remain
vulnerable” to “runs” on the shadow banking system.
In the wake of the crisis, Bullard said it is proper for Congress
to give the Fed “the lead role in the new regulatory structure,” given
that “as the nation’s lender of last resort, the Fed will be at the
center of managing any future financial crisis.”
“The reform response should be to provide the Fed with an
appropriately broad regulatory authority,” he said. “A future Fed, with
an appropriately broad regulatory responsibility, provides the U.S. with
the best chance to head off a future crisis.”
But Bullard objected to limiting the Fed’s role to regulating the
largest firms, making it a “Wall-Street-only Fed.”
“The Fed should remain involved with community bank regulation so
that it has a view of the entire financial landscape,” he said. “It is
important that the Fed does not become biased toward the very large,
mostly New York-based institutions.”
Regulating a broad range of banks, large and small, “helps the Fed
make sound monetary policy decisions,” he said.
Bullard also expressed a number of other strong reservations about
legislative reform proposals. For one thing, he deplored the lack of any
effort to reform the GSEs, such as Fannie Mae and Freddie Mac which
securitized and sold many of the questionable mortgage loans.
He enunciated a number of other reservations about reform
proposals.
He said it is “far from clear” whether a systemic risk council
would prevent future crises.
“It is not likely that this Council, had it existed in the past,
would have advocated aggressive action to control systemic risk,” he
said. “It seems like it would be difficult for an interagency Council to
come to agreement on a specific risk and an associated action when times
are good.”
Bullard said “the role of the Council would be to ‘take away the
punch bowl as the party gets started,'” but said “this type of decision
may be better suited to the Fed. The Fed is more politically independent
than a Council.”
He said a proposed “resolution” authority that could seize and wind
down systemically important firms in danger of insolvency “might”
prevent a future crisis, but again he was very skeptical.
He said the “key concern” would be: “How credible will the regime
be?”
“If it is not credible and the government is going to come in after
all, then it is useless,” he said “‘Funeral plans’ for the firm in the
event of failure do not strike me as credible.”
Another key concern is “how much global cooperation can be
expected?”
Bullard said proposals to restrict 13(3) lending would not only not
prevent future crises, but “will probably exacerbate a future crisis. A
future Fed may be hamstrung and forced to let the crisis roll on.”
Bullard was equally dubious of the House’s proposed Consumer
Financial Protection Agency (CFPA).
“Would this prevent a future crisis?” he asked. “I don’t think so.”
“A fair playing field is certainly desirable in all consumer
products,” he said. “But the housing boom was a classic gold rush: most
people bought the houses because they thought the prices would keep
rising. A CFPA would not have changed the gold-rush dynamic.”
Bullard said the type of runs on the shadow banks as the crisis
intensified cannot be prevented just by raising capital requirements.
“That’s not going to solve the problem if people come to the shadow
banks all at once and want their money,” he said.
“I do not see this issue being addressed,” he said, adding, “I
think the nation will remain vulnerable to runs in the shadow banking
sector.”
Bullard suggested he would have let Bear Stearns fail, instead of
being bailed out by the Fed, to induce more “market discipline. But he
said vows to let “too big to fail” firms fail are “not credible.
Bullard said part of the problem leading up to the crisis is that
“all were taken in by the allure of securitized products in various
ways. The shock was to the entire global industry, not so much to
particular firms.”
“How can we prevent an entire industry from adopting the same
strategy?” he asked. “I do not see this being addressed.”
** Market News International **
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