Dodd-Frank Imperfect, but a "Major Achievement," Says Fed Vice Chair

Stanley Fischer

Federal Reserve Vice Chairman Stanley Fischer, who assumed his post on May 28, said in a recent speech that since the financial crisis the United States has done much to strengthen the financial system and reduce the likelihood of future crises. At the same time, he warned that it is impossible to completely prevent another crisis.

Consequences of crisis still reverberate
"Fortunately, policymakers succeeded in dealing with the situation better than many had feared they would," Fischer said in the Martin Feldstein Lecture at the National Bureau of Economic Research. "Unfortunately, we are still dealing with the consequences of the collapse and the steps necessary to deal with it."

The July 10 speech in Cambridge, Massachusetts, was Fischer's first as Fed vice chairman. In the lecture, he focused on three topics: capital and liquidity for banks and other financial institutions, macroprudential supervision, and the problem of too big to fail. His major points included:

  • Through stress tests, and higher capital and liquidity ratios for systemically important financial institutions, regulators and supervisors have strengthened bank holding companies and thus reduced the probability of future bank failures.
  • Work on the use of the resolution mechanisms set out in the Dodd–Frank Wall Street Reform and Consumer Protect Act holds out the promise that troubled banks can resolved at no direct cost to the taxpayer, and in any event at a lower cost than was possible previously. However, Fischer cautioned that work in this area is less advanced than the work on raising capital and liquidity ratios.
  • It will be important to ensure that different regulators coordinate effectively, especially during a crisis.
  • Great progress has been made in dealing with the too big to fail (TBTF) problem. "While we must continue to work toward ending TBTF or the need for government financial intervention in crises, we should never allow ourselves the complacency to believe that we have put an end to TBTF," Fischer said. He added that the idea of "simply" breaking up the biggest banks is not simple at all, and that it is unclear whether doing so would result in a more stable financial system.
It isn't perfect, but the Dodd—Frank Act is "a major achievement," Fischer said. "At the same time, we need always be aware that the next crisis—and there will be one—will not be identical to the last one, and that we need to be vigilant in both trying to foresee it and seeking to prevent it."

July 18, 2014