The United States is a long way from putting in place rules that will protect the financial system and the economy from broad risks, due in part to regulatory structure and to the difficulties of predicting the next crisis, a top Federal Reserve official said on Saturday. New York Fed President William Dudley, an influential Wall Street supervisor, warned against hastily putting in place so-called macroprudential tools, which would go beyond regulating specific banks and firms and focus on the broader financial sector.
"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," he told a conference in Boston. The deep 2007-2009 financial crisis spurred global regulators to ramp up oversight of not only individual firms but of financial markets generally, so that problems in the real estate sector or specific credit derivatives for example would not infect the economy.
While different regions of the world have varying approaches to getting this done, US regulators rely on the Financial Stability Oversight Council, or FSOC, an umbrella body wherein the Fed, the US Treasury, the Securities and Exchange Commission and other agencies could coordinate responses to crises.
But, Dudley said, "I believe this is likely to prove difficult to do in practice (given) each of the regulatory agencies guards its own authority and prerogatives, and may not always be responsive to pressure from other regulators or the US Treasury." And "even if the FSOC could be effective in developing a consensus among the regulators, I wonder whether it could do this in a timely way," he added. While open to working on predicting financial crisis, Dudley said, "it is very hard to anticipate these episodes and put rules in place that would limit such excesses."