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A Call for Practical Reform

But unraveling Dodd-Frank isn’t wise in Fed chair’s view.

By Bill Poquette

Answering critics who have suggested regulatory actions spawned by the Great Recession are inhibiting economic growth, Federal Reserve Chair Janet Yellen countered with a strong defense of the measures taken to spur recovery in her keynote speech this summer at the annual symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo. At the same time, she offered some hope for lessening the regulatory burden, especially for community banks.

“The events of the crisis demanded action, needed reforms were implemented, and these reforms have made the system safer,” she said. “Now — a decade from the onset of the crisis and nearly seven years since the passage of the Dodd-Frank Act and international agreement on the key banking reforms — a new question is being asked: Have reforms gone too far, resulting in a financial system that is too burdened to support prudent risk-taking and economic growth?”

The effects of capital regulation on credit availability have been investigated extensively, Yellen explained.

“Some studies suggest that higher capital weighs on banks’ lending, while others suggest that higher capital supports lending,” she said. “Such conflicting results in academic research are not altogether surprising. It is difficult to identify the effects of regulatory capital requirements on lending because material changes to capital requirements are rare and are often precipitated, as in the recent case, by financial crises that also have large effects on lending.

There may be benefits to simplifying aspects of the Volcker rule, Yellen acknowledged. At the same time, the new regulatory framework overall has made dealers more resilient to shocks.

Credit appears broadly available to small businesses with solid credit histories, according to Yellen, who also conceded that indicators point to some difficulties facing firms with weak credit scores and insufficient credit histories.

“Small firms rely disproportionately on lending from smaller banks, “ Yellen said, “and the Federal Reserve has been talking steps and examining additional steps to reduce unnecessary complexity in regulations affecting smaller banks.”

There is more work to do, Yellen noted, as she concluded the Jackson Hole speech. Many reforms have been implemented only recently, markets continue to adjust and research remains limited, she pointed out. “The Federal Reserve,” she said, “is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system.”

Following the symposium, American Bankers Association President and CEO Rob Nichols expressed agreement with Yellen, especially with her acknowledgement that not all the rules are working as intended and the Fed is willing to make ‘appropriate adjustments.’

“In order to accelerate economic growth and make sure Americans get access to the credit they deserve, we urge that those fixes be made sooner rather than later,” Nichols said.

But any reversion to the wild trading days of the early 2000s doesn’t seem prudent. JPMorgan Chase and Goldman Sachs are reporting nice profits, even with less trading revenue. Loans and net interest income are growing, albeit not setting any records.

In short, the wisest course was suggested by Bloomberg editors on the firm’s website in response to Yellen’s speech: “Improve the system, don’t dump it.”

Bill Poquette is editor-in-chief of BankNews.

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