Financial Update (Second Quarter 2009)

Atlanta Fed President Calls for "Agile Oversight" of Financial Institutions

photo of Atlanta Fed President LockhartCiting some encouraging signs in the economic outlook, Atlanta Fed President and Chief Executive Officer Dennis Lockhart said in a speech on April 16 that now is the time to think about the post–financial crisis financial regulatory architecture.

In his remarks to the Levy Institute of Bard College in New York, Lockhart answered what he described as a fundamental question: "What regulatory environment will both align with the reality of financial markets and adequately address recent failings?"

Securitization still holds benefits
In describing the future environment, Lockhart said he expected an ongoing role for securitization, which has brought benefits to consumers that cannot be easily matched by a bank that originates a loan to hold to maturity. But he also discussed the need for some changes in securitization.

"Going forward, markets and investors will show a new awareness of the potential for complexity, opacity, and risk in securitized instruments," Lockhart said. "This awareness, in and of itself, has and will continue to provide incentives for the creation of simpler and more transparent securitization structures."

Related
Text of speech
Dennis Lockhart biography off-site image

Regulatory structure must evolve
In discussing the future of regulation, Lockhart said the regulatory environment "must be suited to a financial system that remains a mix of capital markets and institutions—formal and shadow banking—with an array of institutional operating models." Lockhart called for what he termed "agile oversight," which stresses actively managing risk as it evolves with the associated potential for an institution failing versus an approach that focuses on avoiding failure.

After the financial markets crisis has passed, the regulatory environment should be a balanced blend of rules and principles and should preserve a meaningful role for market discipline, he said. Acknowledging the challenges associated with resolving diversified, global financial institutions, Lockhart called for resolution planning as a continuous effort on the part of regulators.

 

 

April 29, 2009