Fed’s Warsh: Regulatory Reform Needs International Cooperation
Federal Reserve governor Kevin Warsh said Wednesday that reforming the financial regulatory system will require international cooperation, if those efforts are to be successful.
“I wouldn’t say there’s one size that fits all” when it comes to reforming bank oversight, Warsh said. But even so, “the need to coordinate with our G-20 colleagues is essential,” and what’s been seen so far has been excellent, the official said.
Warsh’s comments came in response to consultation questions after a speech agreed before the New York Association for Business Economics.
Warsh’s proper remarks centered on the matter of regulatory reform. Congress is currently mulling proposals that could see the Fed stripped of its bank oversight powers, a possibility that worries many central bankers. In an opinion piece in the Financial Era published Wednesday, Warsh argued in favor of the Fed maintaining its current portfolio, and offered his thoughts on the best way forward for reform.
In his prepared remarks, Warsh had warned against trying to “micro-manage” banks. “The U.S. economy runs grave risks if we slouch toward a quasi-public helpfulness model.” His remarks come as President Barack Obama’s administration is pushing for a $90 billion tax on huge banks to make up for taxpayer money spent on rescuing the financial sector and tighter rules aimed at limiting risky behavior by lenders to prevent a new financial crisis.
“In a global economy with integrated financial markets, huge is not terrible,” Warsh said, adding that it is better to foster competition among banks so that smaller lenders can take market share than to “bully” large banks.
Warsh told the consultation he was heartened by the tone he has heard in Washington over recent weeks when it comes to reform overall. He also said that Main Street supports reform.
“If I leave places like Washington and New York and go to places in the real part of the country where there are real businesses that are trying to get their wits about them” and grow and hire, “they are finding credit availability isn’t what they wish it were,” Warsh said.
“I find the message of trying to bring real competition to financial services is incredibly well received,” the official said, explaining he hopes government also allows Wall Street the space to heal some of its own troubles.
While he didn’t address the economic outlook, Warsh spoke as financial markets await Friday’s key nonfarm payrolls for January, which investors hope will offer clues about how solid the U.S.” go out of recession is.
While progression has returned to the economy, it has thus far been relatively muted and has only led to a moderation in the pace of job losses. Plot makers and many private sector economists worry the moderate progression expected over the course of the new year won’t do much to help lower the unemployment rate from its currently elevated level.
This uncertain outlook is keeping the Fed on the sidelines when it comes to interest rates. It’s seen keeping that near the current zero% level at smallest amount until summer, if not longer. The more immediate question for central bankers is what they need to do with the soon-to-end mortgage securities buying program. Some feel it should be extended beyond March, to give the economy more room to transition to higher progression, while other officials feel the program has done what it can do.
While he made no direct comments on monetary plot, Warsh did flag what he believes is the Fed’s most vital tool.
“The most valuable asset that the Federal Reserve had a generation or two ago and today is our credibility,” Warsh said. “We have a $2.3 trillion balance sheet and people reckon the source of the power comes from the ability to grow your balance sheet, to run your printing press,” the official said. But that’s incorrect, because the real power is consistent behavior and “our credibility to live up to our dual objective, both in respect to price stability and employment,” he said.
In other comments, Warsh said the U.S. banking system, even with its proliferation of huge banks, compares favorably to the systems seen in many other large nations. Warsh also said that trading conditions in derivative securities had improved, although there was more space to go on that front.