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K.C. Federal Reserve President George says Dodd-Frank encourages risk behavior

Esther George

Esther George, the president of the Kansas City Federal Reserve, said on Friday that major U.S. reforms meant to avoid another financial crisis fail to address industry weakness and could actually make matters worse the next time.

George, speaking in Beijing, said that Dodd-Frank encouraged, not discouraged, risky Wall Street behavior, according to Reuters.

“Unfortunately, governance and market discipline mechanisms are at risk of being diluted by a panoply of regulations,” George said, according to Reuters. “Nowhere is this more obvious than in the Dodd-Frank Act.

“Rather than adding regulation, we could better align incentives by allowing stockholders, unsecured creditors and bank management to bear full responsibility for losses incurred by their institutions.”

Dodd-Frank was meant to prevent a repeat of the 2008 financial crisis, but George was skeptical that it would meet its goal. She said that the law so far has massively extended the public safety net, encouraged risk-taking and will create 30,000 pages of laws by the time it is completed.

“Will more complex regulations contribute to a more stable financial system?” George said, according to Reuters. “After having spent most of my career as a bank supervisor, I have my doubts. Supervisory lapses exposed during the crisis were not the result of inadequate regulation.”

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