IGTA Journal - Autumn 2017

exposures of the large clearing banks have been dramatically reduced . This means that they have less reason to back away from a firm if it were to become troubled. And, firms are much less reliant on short-term wholesale funding. We have also reduced the amount of risk in the system by requiring that most standardized OTC derivatives be cleared through CCPs, where multilateral netting occurs . In a centrally cleared regime, major intermediaries have net exposures to individual CCPs that replace much larger bilateral exposures to other financial intermediaries. Of course, this means putting more eggs in the CCP basket. So, it is particularly important now to closely watch that basket . Greater oversight of CCPs is necessary to ensure that they have good governance, sound risk management, robust technological infrastructures, and adequate liquidity support. In addition, we have made considerable progress in developing a viable resolution regime for large, systemically important banks and securities firms. More work is still needed Yet, we should not be complacent, as there are important areas where our work is not complete . Relative to other countries, the United States has limited ability to implement effective macroprudential tools. That is because oversight is shared by several different entities, and the power to implement macroprudential tools is constrained. Another challenge is the diverse structure of the U.S. financial system, in which non-banks and capital markets play a substantial role in credit intermediation. Although the Financial Stability Oversight Council (FSOC) could conceivably play a greater role here, whether it will be able to do so effectively remains uncertain. Another issue that needs attention is the ability to resolve large, complex financial firms that operate on a global basis. The framework of requiring such firms to hold a large buffer of debt that could be converted into equity at the time of non-viability is an important step forward. But, the task of operationalizing this on a global basis in a way that is fully credible to these firms’ customers and counterparties has not been completed. Achieving clarity about the roles and responsibilities of home and host country authorities is still a work in progress. The Federal Reserve’s lack of authority to lend to a major securities dealer that gets into difficulty is another outstanding issue. The Dodd-Frank Act narrowed the Federal Reserve’s authority under Section 13(3) of the Federal Reserve Act. No longer can the Federal Reserve lend to an individual securities firm or non-bank financial intermediary. Such authority may not be as necessary now that the Federal Deposit Insurance Corporation (FDIC) has the power to lend under Title II of the Dodd-Frank Act and firms are required to have sufficient resources to support their resolution plans. But, I would prefer having such a tool available in extremis given the potential need to buy time for coordination and critical decision-making. I think it is important to ensure that one can “get to the weekend.” Finally, the work needed to ensure that CCPs can always recover has not yet been completed. This is an issue of increased importance given that their role in the financial system has become more prominent. Where the pendulummayhave swung too far At the same time, there are some areas where the pendulum may have swung too far, where the costs of regulation—including compliance costs and the potential impact on the provision of services—are likely to exceed the benefits. In this vein, I favor regulatory relief for smaller banking organizations. First, such firms individually are not systemically important, and therefore do not pose a significant risk to the viability of the U.S. financial system. Second, the regulatory burdens on smaller firms can be heavy because they don’t have the scale over which compliance and other regulatory costs can be spread. Regulatory requirements should be appropriately calibrated to avoid inadvertently creating a competitive advantage for larger financial firms. 4 5 6 7 5 / 7 BIS central bankers' speeches IGTA eJournal | Autumn 2017 | 57