Federal Reserve Bank of New York (“NY Fed”) President and CEO William C. Dudley discussed regulatory efforts to bolster the safety of the financial system in the wake of the financial crisis. Mr. Dudley explained that two types of initiatives have contributed to regulatory progress: (1) those that were designed to enhance firms’ ability to absorb shocks, such as capital and liquidity requirements, and (2) those that reduce structural vulnerabilities within the financial system.
Mr. Dudley highlighted reforms to the tri-party repo system, the shift from bilateral settlement to central clearing in the derivatives industry, and the increased resiliency and strength of central counterparties, as important indications that recent regulatory initiatives have decreased structural vulnerabilities.
Mr. Dudley also called for reforms that would address issues of bank culture and conduct. According to Mr. Dudley, banks should be “attentive” to incentives put in place to encourage better behavior and establish social norms. He also urged bank leaders to foster an atmosphere that encourages people to speak up when they witness questionable behavior.
Mr. Dudley delivered his remarks during a panel discussion on the status of financial regulation at the G30’s 76th Plenary Session.
Lofchie Comment: As he has done in the past, Mr. Dudley has been consistent in expressing this view of regulatory developments. Suffice to say that others have expressed different views on many of these regulatory developments. For example, some have argued quite convincingly that the move to central clearing creates as many risks as it resolves (and that the new risks are more serious). See, e.g., Streetwise Professor Claims “Brexit Horror Story” Highlights Dangers of Clearing Mandates; see also OFR Paper Questions Whether Higher Capital Standards Reduce Bank Risks.