(Reuters) – A senior Federal Reserve official on Friday criticized major U.S. reforms designed to avoid a repeat of the devastating 2008 financial crisis, saying they failed to address industry weaknesses and could make matters worse the next time around.
In a speech in Beijing, Kansas City Federal Reserve President Esther George suggested the Dodd-Frank Act had entrenched certain institutions as “to”, encouraging more, not less, risky behavior by Wall Street.
“Unfortunately, governance and market discipline mechanisms are at risk of being diluted by a panoply of regulations. Nowhere is this more obvious than in the Dodd-Frank Act,” she said in remarks prepared for delivery to the Financial Stability Institute-China Banking Regulatory Commission.
“Rather than adding regulation, we could better align incentives by allowing stockholders, unsecured creditors and bank management to bear full responsibility for losses incurred by their institutions,” she said.
U.S. taxpayers bailed out the country’s financial industry to the tune of hundreds of billions of dollars during the crisis, igniting public fury when it emerged that Wall Street bankers had paid themselves millions of dollars in bonuses while ordinary Americans lost their jobs and homes.
George, who is not a voting member of the Fed’s policy-setting committee this year and whose prepared remarks made no direct mention of U.S. monetary policy, echoed the anger of Main Street America.
Dodd-Frank is designed to prevent a repeat of the crisis, triggered by excessive betting on the subprime housing market that bank regulators failed to prevent.
George voiced skepticism it would meet that goal, noting it had massively extended the public safety net, encouraging more risk-taking in the future, while creating a law that could sprawl over 30,000 pages once all its rules had been written.
“Will more complex regulations contribute to a more stable financial system? After having spent most of my career as a bank supervisor, I have my doubts. Supervisory lapses exposed during the crisis were not the result of inadequate regulation.”
Arguing America must develop the “resolve” not to bail out bank shareholders and creditors when their firms get into trouble, George also said that the excessive culture of boardroom pay also needed to change.
“Incentive-based compensation and other remuneration for executives should not be a one-way street that only goes up and fails to extract a price for financial loss.”