July 20 - The following statement on the Financial Stability Oversight Council's second annual report was provided by John P. Ducrest, commissioner, Louisiana Office of Financial Institutions, and member, Financial Stability Oversight Council.
The Financial Stability Oversight Council has released its second annual report on the stability of the U.S. financial system. The report is an important assessment of our financial system, which I believe all financial institutions should review and consider as part of a broader assessment of risks.
The report highlights the ongoing problems in Europe which dominate our financial press. The report demonstrates that direct exposure of U.S. institutions is modest, and certainly does not extend to the overwhelming majority of banks. However, as we saw during 2008 and 2009, the spillover effects from a systemic event are unknown and can be far-reaching. All institutions should assess the potential for direct and indirect exposures to their own organization and local economy.
The report appropriately acknowledges the earnings challenge posed by the low interest rate environment. This is a policy choice the Federal Reserve has made to support economic growth. Unfortunately, the extended low rate environment has a corrosive effect on a bank’s net interest margin. Bankers have had to exercise great skill to manage this scenario in an effort to preserve or achieve profitability. We must also realize that these efforts are creating additional interest rate risk and may amplify credit risk in the future. These are risks that must be understood and managed.
Two years after the passage of the Dodd-Frank Act, the activities and risks of the world’s largest banks continue to dominate the financial media and require extraordinary regulatory resources. The federal agencies have made progress in implementing the key provisions of the Dodd-Frank Act to address the risk posed to the system by the largest institutions. However, the United States still has a “too big to fail” problem. The size of the problem has only increased since the financial crisis.
Until the required reforms, and perhaps additional measures, are fully implemented and vigorous oversight is consistently applied, the market will continue to grant these firms preferential terms, creating pricing and competitive inequities. As we move further from the realities of the financial crisis in the U.S., we must remain vigilant to ensure the largest, most complex firms reduce their systemic footprint. This will help to preserve a diverse banking system, thereby ensuring access to credit in all communities across the United States. This will provide the foundation for economic stability and growth.