New York Fed's Dudley Supports Reconsidering Key Banking Rules

(Bloomberg) -- It's time to rethink major Wall Street regulations, including the Volcker Rule and the Federal Reserve's annual stress tests of banks, now that almost a decade has passed since the financial crisis, New York Fed President William Dudley said.

“It is entirely appropriate to take a critical look at the changes that were made to the regulatory regime,” Dudley said in remarks prepared for an event Friday at the Princeton Club of New York. The obvious -- and bipartisan -- possibility for easing smaller-bank regulations is one place to start, he said, but he signaled openness to changes that would affect larger banks, too.

The Volcker Rule's ban on banks investing their own money left the line between making markets and proprietary trading “not always clear-cut,” Dudley said. So, it might make sense to give Wall Street trading desks more discretion, he said.

Dudley added that he's open to revamping a key Dodd-Frank Act requirement that subjected all banks with more than $50 billion in assets to stringent oversight. The threshold could be raised “significantly,” he said.

Stress Tests

Dudley also addressed a key aspect of the Fed's supervision powers: the annual stress testing of large banks. He said the agency “should consider changes that might lessen the burden it places on banks,” including tweaking some of the assumptions that the regulator makes about plans for shareholder dividends during a crisis.

In its exams, the Fed currently assumes banks will continue paying dividends during deep economic slumps, which Wall Street executives have argued is off base.

The New York Fed chief's comments come as the Trump administration works to reduce banking regulations. President Donald Trump and White House officials have said they'll seek to dismantle some of the Dodd-Frank rules put in place after the 2008 crisis.

Dudley was critical of Republican lawmakers' efforts to scrap a system set up under Dodd-Frank that lets the Federal Deposit Insurance Corp. take down failed financial firms. The alternative -- bankruptcy court -- doesn't make sense unless the process is improved to establish a liquidity backstop for massive firms, he said.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editor responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Justin Blum