Add Federal Reserve Governor Jerome Powell to the growing chorus of those seeking a reconsideration of the nation’s regulatory regime.
“Today, our financial system is without a doubt far stronger than it was before the crisis,” Powell said during an April 20 speech at The Global Finance Forum, Washington, D.C. The largest financial institutions now hold much higher levels of higher-quality capital, he said. They hold higher levels of liquidity, and are much less reliant on runnable short-term funding.
“They are subject to rigorous, forward-looking capital stress tests that recognize the dynamic nature of financial risks,” Powell added. “And they have submitted several rounds of resolution plans that are helping to ensure that they could be safely reorganized should all these other safeguards prove insufficient.”
Financial market infrastructures are also much stronger, he said, adding that the Securities and Exchange Commission also implemented reforms that address weaknesses in the structure of prime money funds. Similarly, nearly 75 percent of interest rate and credit default swaps are now centrally cleared, which allows for greater transparency and more consistent risk management.
“Many of the statutory provisions and regulations put in place to effect these changes were novel; it is not likely that we would have gotten everything exactly right on the first attempt,” he said. “This is a good time to step back and ask what changes have worked and where adjustments should be made.”
A few themes sould guide this next phase, Powell said.
“First, after years of raising capital and liquidity standards, and of stress tests and living wills, our financial system is much stronger now,” he said. “We should protect these core reforms and avoid a return to the highly vulnerable system that existed before the crisis.”
In too many cases new regulation has been inappropriately applied to small and medium-sized institutions, he added, citing a “need to go back and broadly raise thresholds of applicability and look for other ways to reduce burden on smaller firms.”
“The new rulebook is excessively complex,” Powell added, urging the need to look “for ways to simplify the rules so that they support our goals but also improve the efficiency of regulation.” For example, he suggested allowing boards of directors and management to spend a smaller portion of their time on technical compliance exercises and more time focusing on the activities that support sustainable economic growth.
“Fourth, we need to continue to strive to provide an appropriate level of transparency to supervised firms and the public regarding our expectations,” Powell said. “Some aspects of the new regulatory program are proving unnecessarily burdensome and should be better tailored to meet our objectives…I support adjustments designed to enhance the efficiency and effectiveness of regulation without sacrificing safety and soundness or undermining macroprudential goals.”
One offered example of where adjustments are warranted is the supervisory relationship with the boards of directors of banking firms. “After the crisis, there was a broad increase in supervisory expectations for these boards,” Powell said. “But it is important to acknowledge that the board's role is one of oversight, not management. We need to ensure that directors are not distracted from conducting their key functions by an overly detailed checklist of supervisory process requirements.”
Instead, “boards of directors need to be able to focus on setting the overall strategic direction of the firm, while overseeing and holding senior management accountable for operating the business profitably, but also safely, soundly, and in compliance with applicable laws,” he added. “We are currently reassessing whether our supervisory expectations for boards need to change to ensure that these principles, and not an ever-increasing checklist, are the basis of our supervisory work related to boards.”