Governor Sarah Bloom Raskin
At the Federal Reserve Bank of New York Community Bankers Conference, New York, New York
April 7, 2011
Thank you for the opportunity to join you this morning. Let me begin by saying that it’s a pleasure for me to be among community bankers. I used to be the banking commissioner in Maryland and will always be grateful to the community bankers there who were crucial to informing my views on effective bank regulation. At the height of the mortgage crisis, those same community bankers partnered with regulators like me to survey the wreckage and to stabilize our communities as best we could. Together, we confronted and weathered that searing experience and learned many lessons along the way. I’m here today to share with you some of those lessons.
Although decisive action by policymakers has been successful in containing the crisis, we should not presume that the experience of the crisis is over. To be sure, the frantic days of rushed mergers of major financial institutions; emergency applications of nonbanks to become bank holding companies; and large-scale, targeted Federal Reserve programs to stabilize markets and restore the flow of credit are behind us. If we were doctors, we’d say that we had successfully treated the worst symptoms of the illness.
But as we’ve learned from the other crises that are buffeting our world today, both natural and man-made, rescue and containment are only the first steps. Now we must address the aftershocks of the subprime mortgage meltdown: dislocation, joblessness, and loss of confidence.
From a regulatory and supervisory perspective, we will certainly be dealing with the long-term consequences of the crisis for years to come. And, as we head toward an increasingly healthy, but still highly complex and concentrated, post-crisis financial system, we must strive to find the appropriate balance of responsibility between banks and supervisors. I’m hoping to open the dialogue about that today.
A significant backdrop to the post-crisis financial architecture is the expansive federal legislation that is known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Broadly speaking, Dodd-Frank gives us a roadmap for updating the regulatory framework of our financial system post-crisis, but it does not give us turn-by-turn directions for how to incorporate the new requirements into our supervisory processes. To that end, the Federal Reserve and other federal regulators are devoting considerable time to implementing the requirements of the Dodd-Frank Act. Translating all of the new legislative requirements into rules and regulations, and then into an effective supervisory and examination program, is a massive undertaking, but it is essential to moving beyond the stabilization phase of crisis recovery and into that phase where we address the underlying fault lines in our financial institution landscape.
As we work through Dodd-Frank implementation, we will need to ask: What constitutes effective supervision in the post-crisis world? I expect that the answer will be the subject of debate for months and possibly years.
The process of identifying the factors most important to constructing an effective supervisory and examination program has already begun. For America’s community banks, the vast majority of which did not contribute to the subprime crisis, the contours of this program will be of critical importance.
As we have learned all too well, a financial system dominated by a handful of large institutions is unlikely to be resilient in the face of a crisis. My view is that a diffuse financial system–one with a diverse range of institutions of varying size and complexity–is preferable to a system that is highly concentrated. (continued)
Source: www.federalreserve.gov
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