AB Kansas City Fed Chief Esther George Takes Simpler-Is-Better Approach 2012.03.07 - 0 views
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Esther George
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didn't the Dodd-Frank Act of 2010 end "too big to fail," and won't its "living wills" provision nudge our largest banks to become smaller and simpler?
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realizes regulatory tactics and strategies must evolve as banks balloon in size and scope, George insists boots-on-the-ground supervision is crucial. She worries complex approaches are overshadowing common-sense judgments.
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Stress testing is a "useful tool to gauge potential losses from different economic scenarios. It is no substitute for supervisory judgment and examination," she said.
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While the central bank has taken many steps in recent years to open its monetary policy decisions to more scrutiny by outsiders, its regulatory policy making has grown more opaque. Gone are the days when Fed governors debated policy decisions in open meetings. George would reverse that trend.
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You can make any rule as complicated or as simple as you want. The more complicated you make it, and I learned this watching Basel II get crafted, I don't think you ensure any chance of success."
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I would like to see us go back to a time when examiners were required to use judgment. You gave them simple, clear rules and they had to make judgments."
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I have watched over the years. It is an accumulation of compliance, and community banks do not have the scale to spread those costs, so they bear them disproportionately."
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Consumer compliance issues seem to cause the most friction among bankers and their examiners, she said.
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due to prescriptive rules that tell the examiner that you don't get to apply judgment here. If it meets this, this and this test, then it's a problem. That's the frustration of bankers."
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I think about it pretty simplistically. Anytime you have an asset, a loan, that gets into trouble, somebody has to take the loss. The sooner you take the losses," the better.
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George belongs to a growing cohort of folks who question some of the conventional wisdom growing up around community banks, namely that a massive wave of consolidation is coming and the average size must increase.
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both margin pressure and competition from larger banks that can use lower funding costs to undercut smaller rivals.
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is they [banks] need more yield so they will go out for more risk," she said. "And when they do that in a low interest rate environment it can look OK. But those borrowers start looking worse when rates start ticking up.
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I am going to have to start making some credits that I wouldn't normally make because I have to generate earnings.'
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Community banks that survive will be the ones that hold the line on risk but continue to adapt, she said
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community banks are core to the payments system and core to lending in these markets. I don't see that model being outdated. It's always got to be tweaked, but I worry the thing that is going to drag them down is regulation. That seems like something we could address and should address."