william c dudley : lessons of the crisis – the implications for regulatory reform remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the partnership for new york city discussion, new york, 20 january 2010. * * * it is a pleasure to have the opportunity to speak here today. i will focus on the important lessons of the recent crisis and how those lessons should inform the regulatory reform effort. as always, what i have to say reflects my own views and not necessarily those of the federal open market committee or the federal reserve system. in my opinion, this crisis demonstrated that a systemic risk oversight framework is needed to foster financial stability. the financial system is simply too complex for siloed regulators to see the entire field of play, to prevent the movement of financial activity to areas where there are regulatory gaps, and, when there are difficulties, to communicate and coordinate all responses in a timely and effective manner. effective systemic oversight requires two elements. first, the financial system needs to be evaluated in its entirety because, as we have seen, developments in one area can often have devastating consequences elsewhere. in particular, three broad areas of the financial system need to be continuously evaluated : large systemically important financial institutions, payments and settlement systems and the capital markets. the linkages between each must be understood and monitored on a real - time basis. second, effective systemic risk oversight will require a broad range of expertise. this requires the right people, with experience operating in all the important areas of the financial system. in this regard, i believe that the federal reserve has an essential role to play. the federal reserve has experience and expertise in all three areas – it now oversees most of the largest u. s. financial institutions ; it operates a major payments system and oversees several others ; and it operates in the capital markets every day in managing its own portfolio and as an agent conducting treasury securities auctions. also, as the central bank, it backstops the financial system in its lender - of - last - resort role. compared with where we were in late 2008 and early 2009, financial markets have stabilized, and the prospect of a collapse of the financial system and a second great depression now seems extremely remote. even with this progress, however, credit remains tight, especially for small businesses and households. economic growth has resumed, but unemployment has climbed to punishing levels. so while circumstances have improved, they are still very far from where we want them to

followed by similar actions around the world – substantial independence for the central bank in the conduct of monetary policy is now widely regarded as international best practice. policy independence does not absolve the federal reserve from accountability for its monetary policy decisions and the need to clearly explain why they were taken. but it avoids the politicization of monetary policy decision - making. and this is good because politicized central banks generally do not have enviable records with regard to inflation, economic growth or currency stability. risk premia on financial assets are typically much higher in countries with politicized central banks. of course, a reversal of congress ’ s earlier decision would not amount to legislative control over monetary policy decisions. that ’ s not the issue. the issue is that a reversal of congress ’ earlier decision could create the appearance that the legislature seeks to influence monetary policy decisions by establishing a mechanism to publicly second guess those decisions. such a move would blur what has been a careful separation of monetary policy from politics. market confidence here and abroad in the federal reserve would be undermined. asset prices could quickly build in an added risk premium, which might lead to tighter credit conditions. these unintended consequences would undermine the legislation ’ s intent. i ’ m also concerned about those proposals under consideration that would move the regulatory and supervisory functions now held by the federal reserve to other agencies, new or existing. at present, the federal reserve is the consolidated supervisor for bank holding companies, a group that has expanded recently as investment banks and other companies formerly outside the federal reserve ’ s purview have been brought under federal reserve oversight. in my view, further disaggregation or fragmentation of regulatory oversight responsibility is not the appropriate response to our increasingly interconnected, interdependent financial system. funneling information streams into diverse institutional silos leads to communication breakdowns and too often to failure to “ connect the dots. ” in addition, there are clear synergies between the supervisory process and the federal reserve ’ s monetary policy and financial stability missions. the information we collect as part of the supervisory process gives us a front - line, real - time view of the state of the financial industry and broader economy. monetary policy is more informed as a result. only with this knowledge can a central bank understand how the monetary policy impulse will be propagated through the financial system and affect the real economy. similarly, involvement in the supervisory process gives us critical information in fulfilling our lender - of - last -