US Federal Reserve Bank of New York President William Dudley said US policymakers are “a long way” from being able to identify developing risks to financial stability and act in time to prevent future crises.
“My own view is that while the use of macroprudential tools holds promise, we are a long way from being able to successfully use such tools in the United States,” Dudley said, according to the text of remarks he delivered on Saturday at a conference hosted by the Federal Reserve Bank of Boston.
Dudley, who also serves as vice chairman of the Federal Open Market Committee (FOMC), the Fed’s monetary policy panel, did not comment on current interest-rate policy or the economic outlook.
Dudley said the US regulatory structure is fragmented, preventing any single regulator from being able to implement risk-reducing tools in a broad enough fashion.
“As a result, imposing macroprudential tools in the United States would almost certainly leave significant gaps in coverage,” he said, adding “it would be difficult to get all the relevant regulators on board in a timely way to implement macroprudential tools successfully.”
Dudley’s remarks came at a two-day conference focused on discussing how central banks could reduce the risk of broad financial crises.
The Fed has taken a renewed interest in identifying potential systemic financial threats since the global meltdown of 2008 to 2009 pushed the US into its worst recession since the Great Depression.
Dudley, responding to a presentation by the president of the Peterson Institute for International Economics in Washington, Adam Posen, who argued for rule-based regulatory policy, said he saw some “potential advantages of hardwired rules.”
However, he said that such rules would have to be aimed at a broad swath of the financial system while risks could emerge in smaller sectors.
Dudley said the financial system is complex and the first step for financial oversight is to figure out how broad regulatory tools interact with supervisory and monetary policies.
“When are these policies substitutes? When are they complements? How will they interact?,” Dudley said. “How will the governance work in coordinating across these three realms?”
Dudley said policymakers can take “solace” that regulatory changes introduced after the financial crisis have reduced the potential negative impact of another shock.
“We may not be able to anticipate the next area of excess. But with higher capital and liquidity requirements and the use of stress tests to assess emerging vulnerabilities, I think we are much better placed than we have been in the past,” he said.
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