The United States should consider limited adjustments to the landmark financial reforms adopted following the financial crisis, including the so-called Volcker Rule, "stress tests" of large firms and unnecessary burdens on small banks, a key Federal Reserve official said on Friday.
New York Fed President William Dudley, echoing many recommendations of former Fed Governor Daniel Tarullo, who stepped down this week, also pushed back on Republican critics of the U.S. central bank's participation in global Basel meetings meant to coordinate financial regulations.
"It is entirely appropriate to take a critical look at the changes that were made to the regulatory regime," Dudley, whose New York branch serves as the Fed's eyes and ears on Wall Street, told the Princeton Club of New York.
"While we do not yet have evidence of how these reforms will hold up during the next economic downturn, many have been in place long enough that we can begin to evaluate their efficacy," he said of the 2010 Dodd-Frank law that toughened rules and oversight for financial institutions that exacerbated the crisis.
The Volcker Rule was adopted to curb "proprietary," or for-profit, trading by banks using client funds. Dudley said the rule could be made more efficient by possibly giving more discretion to bank traders "to intervene when markets are illiquid and volatile."
He also said the stress tests, meant to ensure big banks can survive random hypothetical shocks, could be adjusted to better align their requirements with separate capital rules. And he repeated that compliance demands on small banks could be relaxed since their failure would not imperil the economy.
In February, shortly after Donald Trump's inauguration, House Republicans pushed the central bank to halt its international meetings until the new U.S. president established priorities. But Fed Chair Janet Yellen rejected the demands, and on Friday Dudley doubled down.
"The argument is made that these international bodies are dictating to and constraining the choices of the United States. That is simply not the case," Dudley said. "The Basel standards … actually benefit the United States and its banks."