World Economy

US Will Fail to Prevent Financial Crisis

US Will Fail to Prevent Financial CrisisUS Will Fail to Prevent Financial Crisis

The current US regulatory structure designed to prevent another financial crisis is “Balkanized,” a “mess” and likely to fail when needed, experts said.

“The current US institutional set-up is likely to fail in a crisis, and will be doing less to prevent a crisis than it should be,” said Adam Posen, president of the Peterson Institute for International Economics, at a two-day conference on financial stability sponsored by the Boston Federal Reserve, MarketWatch reported.

Posen said that US regulators, including the Fed, don’t have the tools or the mandates from Congress that they need.

Posen was especially critical of the umbrella group of regulators, the Financial Stability Oversight Council, that was set up by Dodd Frank to identify and deal with financial stability risks.

He said FSOC is chaired by the secretary of treasury, who is the most political member of the group. “To me, the FSOC is a mess,” Posen said.

Mervyn King, the former head of the Bank of England, agreed that the US institutional structure was a problem. He said US regulators had a knack of working well together in a crisis, whatever the institutional structure.

“It is before the crisis that the US set-up is to be questioned,” King said.

Well before the financial crisis, the US and the Bank of England had a war game to discuss a possible cross-border bank failure, King said.

The U.K. regulators had three key participants, while the U.S. had a “mass choir,” he said.

Former Fed vice chairman Donald Kohn agreed: “broader and deeper structural deficiencies exist in the US regulatory system for macroprudential regulation.”

Kohn said there is a widespread perception in Washington that the Fed is responsible for financial stability, but said in reality the Fed must work in a “Balkanized” regulatory system.

He agreed that FSOC “cannot remedy the underlying flaws of financial regulation in the US.”

During the conference, regulators and experts echoed concerns with the regulatory structure.

Fed Vice Chairman Stanley Fischer said the Fed needed new tools targeted at the real estate sector to prevent another bubble.

Boston Fed President Eric Rosengren suggested that Congress needed to give the US central bank a third mandate to foster financial stability.