An influential New York bank regulator has privately raised concerns in recent weeks about a proposed rule that seeks to make the nation’s largest banks safer, frustrating other regulators who see it as a centerpiece of a financial system overhaul and want it to take effect swiftly.
William C. Dudley, president of the Federal Reserve Bank of New York, expressed his concerns to senior Fed officials in Washington, according to three people who knew about his efforts. The rule, proposed last July and known as the supplementary leverage ratio, would put a stricter cap on the amount of borrowing that the biggest banks can do. Mr. Dudley raised the possibility that the rule could inhibit the Fed’s ability to conduct monetary policy, these people said. They spoke on the condition of anonymity because they were not authorized to speak publicly abot the regulation.
A person familiar with Mr. Dudley’s thinking insisted that he is comfortable with the leverage rule. He took his concerns to Fed officials in Washington merely to help make sure that they had properly considered the rule’s potential effect on monetary policy, this person said. The Fed officials in Washington assessed his concerns but did not think they were serious enough to warrant significant changes to the rule, the three people said.
Still, Mr. Dudley’s concerns played a decisive role in holding up the final version of the rule, two of the people said. Some regulators, including officials at the Federal Deposit Insurance Corporation, were counting on the leverage regulation being completed by the end of last year. Strong supporters of the rule wanted it issued by then to reduce the chances that pressure from bank lobbyists would dilute it. The rule is now expected to come out in April at the earliest.
Since the financial crisis, banking regulators have mostly presented a united front as they have introduced a sweeping overhaul. But tensions have often emerged behind the scenes. And when it comes to commitment to the overhaul, the New York Fed faces greater skepticism than other agencies. It was criticized after the financial crisis of 2008 for failing to stem the huge weaknesses building up under its nose on Wall Street. Its critics said it had become too cozy with the large banks it regulates.
Since the crisis, Mr. Dudley, formerly an economist at Goldman Sachs, has made significant changes at the New York Fed to try to bolster its supervision efforts. He recently said in a hard-edge speech that the string of scandals at large banks suggested the industry might have a widespread ethics problem. And in an interview with The New York Times last year, he disputed the idea that his time at Goldman had made him more tolerant of the institutions he oversees.
“I do not feel that I in any way hold any allegiance or loyalty to the financial industry whatsoever,†he said.
Some of the banks regulated by the New York Fed oppose the leverage rule. Citigroup, for instance, sent a letter criticizing it to the Fed last October. One of the main objections of industry lobbyists is that the rule is harmfully blunt.
Banks have to hold capital against certain assets to absorb potential losses under two approaches, both of which banks have to comply with. One allows them to hold less capital against assets that are deemed less likely to produce losses in the future. But regulators understood there were big shortcomings with that “risk-based†approach, and that banks might find ways to evade such rules. It is also not always possible to predict which assets have the least risk.
In contrast, the other approach â€" the leverage ratio â€" forces banks to hold an equal amount of capital against each type of asset, regardless of its perceived risk. The new supplementary leverage ratio rule merely increases the overall amount of capital that banks must hold against all their assets.
The Fed, the F.D.I.C. and the Office of the Comptroller of the Currency are the agencies writing the final rule.
It was not immediately clear exactly why Mr. Dudley thought a small increase in the leverage ratio might interfere with monetary policy. But bankers have often asserted that it could weigh on two types of assets that play a big role in transmitting changes in monetary policy into the wider economy.
One is “repo†loans, which are short-term market loans that are collateralized with bonds provided by the borrower. The other is cash that banks have on deposit at the central bank. In theory, banks may hold less cash and engage in fewer repo loans if the leverage ratio goes up. In turn, that might make it harder for the Fed to conduct monetary policy smoothly and effectively.
But the increase in the leverage ratio may have little to no effect on markets. Most large banks already comply with the higher ratio demanded in the new rule. And repo markets have already been shrinking for some time, for various reasons. Moreover, banks have been criticized for leaving cash idling at the Fed that they could be using to make loans.
“This rule has been debated ad nauseum, like too many rules that are stuck at the Fed,†said Dennis Kelleher, president of Better Markets, an advocacy group that often favors stricter regulation of Wall Street. “The New York Fed should not be holding it up when the votes to pass it have been there for some time.â€
Ben Protess contributed reporting.
