WASHINGTON — Banks are so 2008.
A surge in new methods and avenues to circumvent conventional bank finance presents the next major challenge for regulators in Washington, the St. Louis Fed’s president, James Bullard, told Business Insider in an interview.
President Donald Trump has vowed to roll back financial regulations aimed at preventing another financial crisis, in particular postcrisis legislation known as Dodd-Frank — regulations Bullard said had made big banks safer by forcing them to fund their operations with more equity capital relative to their debt.
But he argued that the debate over Wall Street rules amounted to fighting the last war.
“I do think we’re at the end of the era of thinking about Dodd-Frank,” Bullard said. “The new issue now for the next 10 years is going to be fintech, and how fintech is going to affect financial intermediation in the US. And if you go out to Silicon Valley, all the discussion is all about how can we strip the profits from the big firms.”
The challenge is that regulatory bureaucracies in Washington, including the Federal Reserve, may be too slow to react to new technology — from cryptocurrencies and blockchain to crowdfunding — in the same way policymakers missed the risks embedded in the “innovations” in mortgage finance that ultimately fueled the worst housing bust and financial crisis in modern history.
“We’re not going to call it banking — we’re going to call it something else,” Bullard said.
“That’s happening every day. I know that the regulatory world here in DC does not react well to that,” he said. “They react legalistically. I think that’s the issue that’s going to face us and the new leadership of the Fed going forward. Weakening Dodd-Frank or doing something more with Dodd-Frank is beside the point when Silicon Valley is as powerful as it is.”
He said big banks’ efforts to domesticate some of the new technologies, including investments in blockchain, may not be enough to catch up with the speed of change coming out of the more cash-flush, venture-capital-driven tech world.
“Banks will always say buy the technology and bring it into the regulated sector,” Bullard added. “But you kind of wonder: Are these really the institutions that are going to be able to innovate quickly or are they just big bureaucracies that are going to be to slow to run this kind of stuff?”