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Fed Head Dudley: Bank Reform Costs 'Manageable'

Monday, 11 Oct 2010 08:23 AM

Concerns new global banking standards will crimp lending and hurt the economic recovery are "exaggerated," the head of the Federal Reserve Bank of New York said on Sunday.

William Dudley, who heads the Fed regional bank tasked with regulating Wall Street, said the new standards will necessarily impose some real costs on the banking system, but the costs will likely be "manageable."

Global regulators, aiming to prevent any repeat of the worst financial crisis since the Great Depression, agreed in September to force banks to more than triple the amount of top-quality capital they must hold in reserve.

"Banks have many ways they can adjust their business models to meet the new standards as they are phased in," Dudley told a conference hosted by the Institute of International Finance.

"Many of these changes can occur without any risk of disruption to the flow of credit to households and business," he said.

The standards are being phased in slowly and many U.S. banks already have large capital buffers, he added.

Dudley, a voter on the Fed's policy-setting committee, did not address the outlook for monetary policy and the economy in his remarks.

But in response to an audience question, he said banks in the United States are no longer tightening credit standards.

"The tightening of credit standards has passed," he said, citing the Fed's senior loan officers' survey.

"I would expect that as time passes, we will see further improvement in credit availability and as that happens that will help support economic activity going forward."

"EXAGGERATED" CONCERNS

Regulators hope reforms will push banks toward less risky business strategies and ensure they have enough reserves to withstand financial shocks, preventing the need for taxpayer bailouts.

Banks have argued the new requirements could reduce the amount of money they have available to lend out to companies, slowing economic growth in Europe and the United States as those regions recover from the financial crisis.

"Some argue that the new standards are too severe," and worry that they will in the short-run constrain credit and in the long-run drive up lending costs and hurt economic performance, Dudley said.

"I believe that concerns over the costs are exaggerated."

Dudley said the tougher standards, which would mean less excess in boom times, could lead to more investment over time due to the prospect of greater economic stability.

He said regulators could, if necessary, tweak the new and relatively untested liquidity standard that aims to ensure banks can fund themselves for 30 days in times of financial stress.

"The tough requirements on backstop liquidity lines could potentially be modified if such rules generated unintended negative consequences for short-term corporate funding markets," he said.

Dudley said while the reforms apply directly only to large, internationally active firms, "they will have wider ramifications for the financial system as a whole, including nonbanks and the capital markets."

Firms in the so-called shadow banking sector rely on credit support and liquidity lines from regulated banks, for example.

"The economics of the shadow-banking sector are likely to change in a way that makes such activities less attractive," he said.

Speaking at an event on the side-lines of International Monetary Fund meetings, Dudley stressed the importance of international cooperation.

Harmonized global standards are "necessary to ensure that banks and other financial firms cannot move their activities to evade regulation," he said.

An area that still needs to be worked on, he said, is how to deal with the resolution of a globally active financial firm, although one approach, to harmonize diverse insolvency laws would be difficult and take many years.

"This is one reason to require additional loss-absorbing capacity for systemically important firms," he said, adding that such a surcharge is currently being pursued internationally and in the United States.

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Concerns new global banking standards will crimp lending and hurt the economic recovery are exaggerated, the head of the Federal Reserve Bank of New York said on Sunday. William Dudley, who heads the Fed regional bank tasked with regulating Wall Street, said the new...
banks,federal reserve,dudley
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2010-23-11
Monday, 11 Oct 2010 08:23 AM
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