NY Fed’s Dudley: systemic vulnerabilities remedied by CCPs, triparty and MMF reform

Some of the obvious systemic vulnerabilities exposed by the financial crisis have been remedied, said William Dudley, President and Chief Executive Officer of the New York Fed in remarks to the US Chamber of Commerce.

Important changes include mandatory clearing of standardized over-the-counter derivatives through central counterparties, or CCPs; more intensive supervision of systemically important CCPs; and reforms of the tri-party repo system and the money market mutual fund industry, he said.

“But, even as we reduce or eliminate old vulnerabilities, we must not rest on our laurels, for new vulnerabilities will inevitably take their place,” he added.

Dudley added that a possible reform could involve putting a greater onus on senior management for the costs incurred from regulatory fines or other legal liabilities, rather than on shareholders alone: “Shareholders should not be shielded from such costs and fines—as they may have also profited from associated gains—but it doesn’t seem fair or prudent to shield the decision-makers from responsibility for costly breakdowns as much as they are now.”

Greater personal liability may also be a powerful incentive to promote better behavior, he added noting that changes in these areas would lead senior managers to encourage their staff to speak up earlier about emerging risks, be more attentive when red flags were raised, and respond sooner and more forcefully.

Dudley will be retiring from the NY Fed this year, and Bloomberg reported that the Board has started talks with possible successors.

Read the full speech

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