Last week, William Dudley, the President and Chief Executive Officer of the Federal Reserve Bank of New York, delivered a speech entitled, “Lessons of the Crisis: The Implications for Regulatory Reform” to the Partnership for New York City Discussion. Mr. Dudley discussed important lessons from the financial crisis and outlined his views on some of the regulatory reform proposals.

Mr. Dudley began his remarks by encouraging the creation of a systemic risk regulator, arguing that, “The financial system is simply too complex for siloed regulators to see the entire field of play, to prevent the movement of financial activity to areas where there are regulatory gaps, and, when there are difficulties, to communicate and coordinate all responses in a timely and effective manner.” In particular, he cited three areas that he believed require constant supervision for effective management of systemic risk: large systemically important financial institutions, payments and settlement systems, and the capital markets. The Federal Reserve, he argued, should play a role in overseeing these three critical areas, because it already oversees most large financial institutions, operates a major payments system, and operates in capital markets on a daily basis.

In addition to the need for a systemic risk regulator, Mr. Dudley advocated a resolution process mechanism that “allows for the orderly wind-down of a failing institution and that limits the contagion to the broader financial system.” In his view, such a mechanism would eliminate the unpopular “too big to fail” problem whereby the federal government is forced to act as guarantor for large systemically important institutions. Finally, Mr. Dudley called for higher capital and liquidity requirements and an alignment of compensation and risk to reduce the chance of failure by large institutions in the first place.

With respect to legislative proposals, Mr. Dudley began by arguing against the need for “audits” of the Federal Reserve by the U.S. Government Accountability Office (GAO). “The notion that the Federal Reserve’s financial dealings are somehow kept hidden from the public is a surprisingly widely held view—and it is simply incorrect,” he said. Mr. Dudley said that the Federal Reserve is audited annually, and that the results of the audit are available to the public. The procedure described as an “audit” by its supporters would empower the GAO to conduct an “ex-post review of Federal Reserve monetary policy decisions,” which, in his view, would be a “potential first step toward the politicization of a process that Congress has carefully sought to insulate from political pressures.”

Mr. Dudley also voiced concerns over proposals to transfer some of the Federal Reserve’s regulatory and supervisory functions to other new or existing agencies. He said that, “further disaggregation or fragmentation of regulatory oversight responsibility is not the appropriate response to our increasingly interconnected, interdependent financial system.”