Fed’s Dudley: Financial System In ‘Much Better’ Shape
The U.S. financial system is in “much better shape,” although small and medium-sized financial institutions are under pressure, which will place a damper on credit availability in the U.S. economy, a top Federal Reserve official said Monday.
“The capital markets are generally open for business–with the vital exception of some securitization markets–and the major securities dealers that survived the crisis have seen a astute recovery in profitability,” Federal Reserve Bank of New York President William Dudley said.
But, “many smaller and medium-sized banks wait under significant pressure,” he prominent. “Loan losses in money-making real estate and consumer and mortgage loans seem likely to continue to pressure smaller banks for some time to come,” which means “credit availability to households and small businesses will still be shortened.”
Dudley’s comments came from the text of a speech agreed at an event held by the Reserve Bank of Australia in Sydney. The gathering is closed to the press.
The official is vice-chairman of the interest-rate-setting Federal Open Market Committee. His comments arrive at a significant time for the central bank, as it mulls how it will unwind its highly stimulative monetary plot stance in the face of a honestly tepid recovery, and as Congress mulls changes to the financial regulatory system that could have major implications for how the central bank does business.
Dudley’s speech was primarily about the financial crisis, in terms of its causes and remedies. As such, he had small to say about the current state of the economy and nothing to say about the outlook for monetary plot.
Much of his speech covered the familiar territory of acknowledging the fact that while plot makers dropped the ball and missed much of what ultimately drove the financial crisis, it was Wall Street practices–primarily excessive bank borrowing– that started all the distress.
Dudley’s remedies were familiar as well. He said to avoid future crises, regulators need to look at more than just individual firms and try to know the linkages that exist between financial companies. Financial infrastructure also needs to be made more robust, in particular in the tri-party repo sector, where banks go to finance their trading positions.
The official also said “we need to strengthen bank capital requirements” and make “global capital standards that place more accent on common equity, establish an overall leverage limit and better capture all of the sources of risk in the capital assessment process.” He said he sees value in debt that can exchange to equity in era of stress, otherwise known as contingent capital.
Dudley also said the financial system’s too-huge-to-fail problem must be addressed. Having some firms be so large they operate with the belief their terrible investments will be bailed out by the government must be countered by making an official mechanism to resolve and wind down a major failed firm. The central merchant banker said higher capital standards will also help prevent firms from on the rise to a threatening size.
Dudley flagged as a sign of the improving financial system the recent end of a host of Fed emergency lending programs.
Despite fears to the contrary, those programs have been moneymakers for the Fed, with the official saying “when a full accounting of the special liquidity facilities is complete, it seems likely that the facilities will have generated substantial incremental earnings that the Federal Reserve will remit to the Reserves.”