Fed, ECB give welcome endorsement of financial regulation

IN the run-up to the US Federal Reserve's retreat in Jackson Hole last week, observers had expected Fed chair Janet Yellen and European Central Bank (ECB) president Mario Draghi to follow the usual routine at the annual central bankers' event and focus on core issues of monetary policy.

Thus, Ms Yellen was expected to drop hints about the Fed's outlook for inflation and the future course of US interest rate hikes, while Mr Draghi was viewed as likely to discuss the euro's recent strength and the pace of the ECB's monetary policy tapering. But instead, both focused their remarks almost entirely on the positive outcome of regulation since the global financial crisis of 2008.

This was particularly timely, given the predilections of the Trump administration in the area of financial regulation. Ever since his presidential campaign, US President Donald Trump has vowed to roll back many of the regulations put in place after the crisis. He has derided the Dodd-Frank Act - the centrepiece post-crisis legislation - as "a disaster". The administration's top officials overseeing economic policies have voiced similar views, and their ideas have started to take concrete shape.

In June, the US Treasury released a report for the president which proposed diluting many key regulations. For instance, it suggested that the Consumer Financial Protection Bureau - a major component of the Dodd-Frank Act which regulates consumer financial products - be stripped of many of its powers. It also called for more exemptions from the Volcker Rule, which prohibits banks from proprietary trading of securities, and recommended a more relaxed bankruptcy code provision to replace the orderly liquidation process mandated under Dodd-Frank to deal with big failing financial institutions. The US House of Representatives has also passed a bill called the Financial Choice Act, which aims to undo many existing banking regulations.

A key rationale for many of these initiatives is that the current regime is one of regulatory overreach, which has inhibited lending and hurt the economy.

In her speech at Jackson Hole, Ms Yellen effectively refuted many of these ideas. She pointed out that "the balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth".

Indeed, she went further to say that reforms such as higher capital requirements for banks have mitigated risks, improved banks' loss-absorbing capacity and resulted in "a return of lending growth and profitability among US banks more quickly than among their global peers".

On his part, Mr Draghi also spoke out against dismantling financial regulations, especially in the light of current policies. "With monetary policy globally very expansionary, regulators should be wary of rekindling the incentives that led to the crisis," he said.

The pushback by Ms Yellen and Mr Draghi against the misguided and ideologically driven moves towards financial deregulation that we are witnessing in Washington are welcome developments. If such ideas gain further traction, it is reassuring to know that at least they will not have the support of the world's two biggest central banks.

READ MORE: Singapore dollar surges against US dollar as central bankers keep mum on policy