Federal Reserve Governor Jeremy C. Stein said last week that while opinions vary as to how to safeguard financial stability, the general consensus is that “strong comprehensive regulation aimed at enhancing resiliency is essential.”
“There is considerably less agreement about the desirability and effectiveness of ex ante measures that seek to lean against the wind in an explicitly time-varying fashion–that is, measures that can be adapted in response to changing economic or financial conditions,” Stein said.
Stein pointed to three “schools of thought,” including individuals who emphasize the “difficulty of identifying emerging financial imbalances” in real time, those who are “more comfortable” with time-varying leans but seek to include a “separation principle” and individuals who seek to apply an combined approach.
He also said the “lean versus clean” framing points to a model in which only two dates exist: an ex ante date prior to when a shock is realized and an ex post date when the shock has hit and policymakers are dealing with the aftermath. Stein said, however, the “lean versus clean” framing is misleading.
“Many financial crises unfold over months or even years, and the choices made during this in-between period can be among the most crucial to the eventual outcome… [I]t seems indisputable that the severity of the  crisis would have been mitigated if policymakers had clamped down on these payouts earlier, and had compelled substantial new equity raises.”
Stein also said that while having the authority to act in to pre-empt a shock is necessary, “institutional will” is also required.
“[I]f we are serious about taking a macroprudential approach to regulation–one which aims to protect not just the solvency of individual firms, but the health of the financial system as a whole and its ability to continue to perform its intermediation role in times of stress–it is incumbent on us as regulators to do all that we can to develop both the intellectual case, and the institutional resolve, to be able to push back with equal force when the time comes,” Stein said.