While there is room to ease the postcrisis regulatory framework for banks, policymakers would make a mistake in making major changes to that structure, Federal Reserve Bank of Cleveland President Loretta Mester said May 18.
Mester said those reforms have made the U.S. financial system more resilient, with large banks having higher capital and more liquidity, along with better risk management programs. But policymakers "cannot take greater resiliency for granted," she said at a European Central Bank event in Frankfurt, Germany.
"I think it would be a mistake to unwind the steps taken since the financial crisis that have led to a more resilient financial system," she said in prepared remarks. "I would like to see how the new settings perform throughout the cycle before making major changes."
Mester said the Fed should follow central banks in other countries and begin publishing a financial stability report. That, she said, would help the Fed communicate better with the public on how it views possible risks to the financial system and any additional steps regulators may take to guard against them.
The U.S. central bank, she added, can also further its understanding of the links between monetary policy and macroprudential regulatory policies, which may help the Fed develop a strategy on how the two should interact.
"In a situation of rising financial stability risks, while using macroprudential tools might be preferred, we have had little experience with these tools," she said. "If they proved to be inadequate and financial stability risks continued to grow, monetary policy should be on the table as a possible defense."
