Lockhart Describes Views of Postcrisis Financial Environment
For immediate release: April 16, 2009
NEW YORK—Citing some encouraging signs in the economic outlook, Dennis P. Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, said it is time to start thinking about life on the other side of the financial crisis, including the financial regulatory architecture. In his remarks to the Levy Institute of Bard College, 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?"
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."
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.
"The regulatory environment we construct should be a well-balanced mix of rules and principles guiding flexible response and should also give a meaningful role to market discipline," he said. Acknowledging the challenges associated with resolving large, globally integrated, and diversified financial institutions, Lockhart called for resolution planning as a continuous effort on the part of regulators.
A transcript of Lockhart's remarks is available.
The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which encompasses Alabama, Florida, Georgia and parts of Louisiana, Mississippi and Tennessee. As part of the nation's central banking system, the Atlanta Fed participates in setting national monetary policy, supervises numerous commercial banks and provides a variety of financial services to depository institutions and the U.S. government.