Federal Reserve Bank of New York President William Dudley said April 7 that liquidity gaps create a need for the regulators' orderly liquidation authority, adding that its regulatory scheme should also continue to work in tandem with international rulemaking bodies like the Basel Committee on Banking Supervision.
In a speech to the Princeton Club in New York, Dudley defended the authority created by Title II of Dodd-Frank, which gives the FDIC the power to act as a receiver for large, interconnected banks. Dudley argued that if Title II were replaced with some bankruptcy process, troubled firms would not have a credible liquidity backstop to pay counterparties running from the institution.
Dudley added that if a financial holding company were restructuring through bankruptcy, the code would not allow the Federal Reserve to lend to securities affiliates of the company, further strangling a struggling company by denying much-needed last resort funds. Dudley said he understands concerns about the government being directly involved in resolving a large firm, but he warned critics to think about comprehensive liquidity backstops before pushing for the elimination of Title II.
Dudley also defended U.S. regulatory participation with international rulemaking bodies, saying that Basel standards benefit U.S. banks by creating a more level playing field.
"In the preponderance of cases, agreements struck in these forums raise international standards closer to existing U.S. standards," Dudley said.
Although Dudley didn't reference President Donald Trump or Congress, his comments come as political rhetoric heats up over deregulation in the finance industry. Sen. Pat Toomey, R-Pa., and Treasury Secretary Steven Mnuchin have both advocated for replacing Title II of Dodd-Frank with a provision that steers failing companies toward the bankruptcy code. On international rulemaking, Rep. Patrick McHenry, R-N.C., has argued that American financial regulators should pursue U.S. interests instead of allowing other countries to dictate how domestic banks should be regulated.
Dudley acknowledge that there is room for reform. He said lawmakers and regulators should explore raising the $50 billion asset threshold for increased supervision and advocated for a streamlined Comprehensive Capital Analysis and Review process. And he said the Volcker rule, which limits proprietary trading, should also be re-examined.
Dudley said that overall he believed the U.S. financial system is "much sounder today than it was on the eve of the financial crisis" and he urged lawmakers not to jettison useful rules as they weigh reform measures.