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NY Fed's Dudley on Dodd-Frank: Keep some, change some

While Federal Reserve Bank of New York President William Dudley believes that some changes to the Dodd-Frank Act are "completely appropriate," there are also some provisions he feels are worth keeping.

In an interview with the Associated Press, Dudley agreed that current regulations should be less strenuous for smaller institutions, as they do not pose a systemic risk to the financial system, which warrants different treatment from large banking institutions.

"[T]hat's certainly something that I think could be done," Dudley said. "I think the Volcker Rule could probably be implemented in a way that made it less of a burden for banking firms. The Volcker Rule actually applies to very small banks, which makes very little sense to me."

The New York Fed president, however, cautioned not to "throw the baby out with the bathwater," as a number of current regulations are worth keeping — in light of the current administration's push to revamp present financial rules — such as increase in capital requirements and liquidity requirements. Dudley also talked about the importance of retaining stress testing and the ability to resolve large systemic institutions without that threatening the rest of the financial system.

Despite some concerns from banking industry bigwigs, Dudley also held a largely positive view of the Fed's plans to normalize its balance sheet, given the "extraordinarily mild" market reaction "[a]s expectations have gone from relatively low probability that we're [the Fed] going to start this to a very high probability that we're going to start this relatively soon."

"[T]hat makes me more confident that when we start, it's not going to have a big consequence for financial markets," he said, adding that the Fed would be "very, very careful" in the gradual roll out of its balance sheet unwinding. Dudley projected that the Fed's current roughly $4.5 trillion balance sheet will shrink to around $2.5 trillion to $3.5 trillion five years from now. Pre-financial crisis, the Fed's balance sheet stood at $800 billion, a figure Dudley said the Fed would not be going back to.