For immediate release: June 21, 2010
Dallas Fed's Fisher Addresses Regulatory Reform in Journal Article
DALLAS—The recent financial crisis highlights the need to further integrate the Federal Reserve’s monetary and regulatory policymaking functions, according to Federal Reserve Bank of Dallas President and CEO Richard W. Fisher in a journal article for International Finance.
“Only by staying abreast of developments in the banking and financial system can the Fed acquire the knowledge necessary to implement monetary policy effectively,” he writes, and thereby better pursue its dual mandate of stable prices and full employment.
Fisher argues that a central bank’s monetary policy and regulatory functions work in tandem with one another and cannot be separated; in fact, they must be enhanced.
“The Fed’s principal functions—influencing market interest rates, acting as lender of last resort and regulating the financial system—are not independent,” he writes. “They constitute an inseparable trinity for pursuing sound policy that ensures economic well being.”
In the journal article, Fisher calls for reforms to correct flaws in the regulation framework that hamper integration of the Fed’s monetary policy and regulatory functions.
He asserts that reforms must: 1) combat “procyclical” regulatory practices, 2) address the connection between bank and nonbank entities, and 3) tackle the lack of cohesion in regulation and the challenges of regulatory arbitrage.
Fisher contends, however, that regulatory reforms alone will not address issues that led to the crisis.
The greatest threat to the stability of the nation’s financial system is the existence of banks considered too-big-to-fail, Fisher says, arguing in support of an international accord to break them up to a size more manageable for their executives and regulators.
“There are limits to size and to scope beyond which global authorities should muster courage to draw a very bright, red line,” he writes. “For until they do so, the danger posed by entities deemed TBTF will remain, waiting to threaten the health of the global economy again and again.”
Fisher’s “International Finance” article builds upon his recent speeches on the too-big-to-fail issue and financial regulation.
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