Dudley Says Regulatory ’Reform’ Remains Incomplete

Federal Reserve Bank of New York President William C. Dudley said the Fed’s efforts at overhauling regulation remain unfinished, with money market funds still posing a risk to the financial system and the largest banks perceived as “too big to fail.”

“We have made significant progress in increasing the stability of the world’s financial system, but the task of reforming the system remains incomplete and uneven,” Dudley said in a letter posted today on the New York Fed’s website as part of its annual report. “Much more must be done to ensure that the financial system is robust enough to absorb shocks and still provide the credit needed for economic growth and job creation.”

Policy makers at the Fed and other banking agencies are still working to implement provisions of the Dodd-Frank Act, the most sweeping overhaul of U.S. financial regulation since the Great Depression, three years after President Barack Obama signed it into law.

The central bank has “much work still to do to reduce the cost to society of the failure of large, complex financial institutions,” Dudley said. He didn’t comment on the economy or monetary policy.

Fed officials and U.S. lawmakers are considering new ways to limit the risk that the failure of a large bank will lead to a taxpayer-funded rescue. The central bank is discussing ways to limit the safety net and curtail balance-sheet expansion at the largest banks, while senators from both parties are discussing legislation that would tighten capital standards.

‘Reform’ Crucial

Dudley cited money market funds as a risk, saying “the size of the money market fund sector and its interconnectedness with the rest of the financial system make reform of these vulnerabilities crucial.”

He also identified as “key” the Fed’s efforts to make the largest banks write “living wills” that detail how the firms could be wound down.

“No matter how much capital or liquidity a financial institution has, there is always some risk that it will fail,” he said.

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