Kansas City Federal Reserve President Esther George said the overhaul of financial regulation under the Dodd-Frank Act has made oversight too complex while failing to end taxpayer bailouts of banks.
“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,” George said today in a speech in Beijing. Regulators must have “resolve” to let creditors and shareholders lose money when institutions fail, she said.
Dodd-Frank, the most comprehensive rewriting of financial regulation since the 1930s, subjected the largest banks to more scrutiny and higher capital requirements. The law requires large banks to draft contingency plans detailing how they would be unwound in a crisis and created a financial-stability council charged with monitoring excessive risk-taking.
“The Dodd-Frank Act itself is full of complexity” and its “mandated rule-making by some estimates could run to as much as 30,000 pages,” George said in the text of a speech to the Financial Stability Institute and China Banking Regulatory Commission. “The complexity inherent in these standards continues to give the most sophisticated financial companies considerable opportunities to arbitrage the process,” she said.
Strict leverage ratios, which are not adjusted based on perceived risks of various assets, are a better way than risk- adjusted capital ratios to ensure financial stability, George said. In addition, “there is no substitute” for experienced examiners, she said.
George was the Kansas City Fed’s No. 2 official under Thomas Hoenig, who retired last year. She didn’t discuss monetary policy in her remarks. George joined the Fed in 1982, spent much of her career in bank supervision and became first vice president in 2009.
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