One of the Federal Reserve’s top policymakers has attacked attempts to reverse the post-crisis drive for tougher regulation, calling efforts to loosen constraints on banks “dangerous and extremely short-sighted”.
Stanley Fischer, the vice-chairman of the Fed's board of governors, said in an interview with the Financial Times that 10 years after the crisis there are troubling signs of a drive to return to the status quo that preceded it. While he endorsed efforts to ease up on small banks, he said political pressure in Washington to curtail regulatory burdens on large institutions was very hazardous.
Republican politicians have been urging a loosening of some capital and liquidity requirements on financial institutions, arguing that they are hampering firms’ ability to lend.
The US Treasury in June put out a 147-page report that recommended, among other things, changing the frequency and the severity of the Fed’s process of stress-testing the strength of the big banks, scrapping the “gold-plating” of global capital and liquidity standards for the largest US lenders, and implementing a looser interpretation of the Volcker ban on banks making speculative bets with their own capital.
Mr Fischer criticised calls to ease up on stress testing, saying pressure to loosen standards on big banks was “very, very dangerous”. He argued that the US had yet to deal with the so-called shadow banking system, which operates outside the mainstream lenders, calling this a “terrible mistake”. And he decried attacks on global bodies such as the Financial Stability Board, which some Republican politicians say has been imposing burdensome regulations on the US, saying “I am worried that the US political system may be taking us in a direction that is very dangerous”.
Mr Fischer said: “It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude. And now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really, extremely dangerous and extremely short-sighted.
“One can understand the political dynamics of this thing, but one cannot understand why grown intelligent people reach the conclusion that [YOU SHOULD]get rid of all the things you have put in place in the last 10 years.”
Mr Fischer was speaking as central bankers prepare for their annual gathering in Jackson Hole, Wyoming, later this month. Discussion there will touch on the health of the world economy a decade after the crisis. While the Fed has lifted rates twice this year, the central bank has been grappling with persistently low inflation.
Mr Fischer acknowledged there are divisions within the Fed over how to respond, saying: “There will be arguments on both sides on this thing. I’m not sure where that discussion is going to end up. This continuation of lower than expected inflation rates is something we have to think about.”
He appeared less uncertain over the prospect that the Fed will announce the start of the process of reducing its balance sheet at its September meeting. While there is a risk of a debt ceiling showdown in Congress at that time, Mr Fischer says "in some deep sense people don't believe the Congress and the administration will allow the United States default on its debt".
Any market volatility will probably be finite in time, he said. “There is also a desire to say that we have some confidence that the system is pretty damn stable.” There will probably be a break between the announcement of the unwinding of QE and the start of the process, Mr Fischer added, and the central bank could always press pause if unanticipated circumstances arise.
- (Copyright The Financial Times Limited 2017)
