In a speech last week, Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, argued that reforms instituted in the United States and world-wide following the 2007-2008 financial crisis have made the financial system “substantially safer.” Generally, she claimed, large banks have reduced by half their reliance on short-term wholesale funding and hold more high-quality, liquid assets; prime institutional money markets funds that “proved susceptible to runs in the crisis” now hold significantly less assets; and regulators have better capability to resolve a large financial institution in dire stress. Ms. Yellen discounted claims that financial reforms have inhibited lending, saying that “…adverse effects of capital regulation on broad measures of lending are not readily apparent.” Notwithstanding, Ms. Yellen noted there might be “benefits” to simplify unspecified parts of the Volcker Rule that limited proprietary trading by banking firms, and to review the interaction of certain bank capital rules. However, concluded Ms. Yellen, “any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years.”
Policy and Politics: Currently, the Office of the Comptroller of the Currency is seeking comments on how the specific requirements it adopted to implement the Volcker Rule should be amended to better effectuate the purposes of the statute. (Click here for background in the article, “OCC Seeks Input How Volcker Regulations Should Be Amended” in the April 6, 2017 edition of Bridging the Week.) Approximately two months ago, the US Department of Treasury of a report calling for substantial amendments to the Volcker Rule and containing other recommendations regarding the regulation of banks and credit unions, in response to President Donald Trump’s Core Principles for the federal regulation of the US financial system issued earlier this year. (Click here for background on Treasury’s recommendations as well as the Core Principles in the article “US Department of Treasury Recommends Modifications to Volcker and Bank Capital Rules, and Rationalization of Financial Regulation” in the June 18, 2017 edition of Bridging the Week.) Clearly there is not unanimity in Washington, DC among policy-makers regarding the impact of post-financial crisis reforms, including all aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Ms. Yellen's current term as FRB chair expires February 3, 2018.