The major goals of President Obama’s 2010 financial reform law have been achieved, a top-ranking Federal Reserve official said Friday in relatively upbeat comments about the health of the banking sector.
“I’m pretty sure that the big goals of the reform of regulation that took place in Dodd-Frank have been achieved in certain areas, namely the banking sector,” said Fed Vice Chairman Stanley Fischer, who was speaking at a meeting of bankers in Washington.
Fed officials, including Chairwoman Janet Yellen, have tried to strike a balance between defending the agency’s recent regulatory efforts and acknowledging public and congressional skepticism about Wall Street. Congressional calls to break up big banks have become more frequent this month in the wake of the fake accounts scandal at Wells Fargo.
Fischer on Friday addressed the putative successes of the new regime and also where it falls short.
While the goals of the Dodd-Frank law have been met, Fischer said, the financial sector still faces threats from nonbanks, or “shadow banking.” He also warned that regulators can never be sure that the problem of too-big-to-fail has been fully addressed.
Regulators lack information about the shadow banking sector, he said, referring to financial intermediation that takes place outside the regulated banking sector.
Furthermore, the Fed and other U.S. agencies don’t have the powers to address broad market trends that other regulators do, Fischer complained. As governor of the bank of Israel, Fischer used far-reaching authority to undertake efforts to constrain the housing market to prevent it from overheating.
As for the problem of banks that are so big that the government effectively cannot let them go bankrupt, Fischer recommended constant vigilance by regulators.
“My view on that is that a regulator or an intelligence agency never knows if it’s solved a particular problem,” Fischer said, and if they say definitively that they have solved the problem, “we should dismiss them and get someone else who understands we’re in a battle” that won’t end soon.
Late last month, under sharp questioning in the House, Yellen declined to say that too-big-to-fail has been eliminated, but did say that the Fed has made “very, very important and meaningful strides” in reforming the financial system.
Fischer expressed some openness to performing more cost-benefit analyses for new regulations, a key change that banks have lobbied for. At the same time, he warned, those analyses are imprecise and in some cases only create jobs for lawyers.
Nevertheless, he expressed support for simplifying the regulatory code to accelerate growth.
