A top Federal Reserve policymaker on Wednesday expressed concern that U.S. reforms enacted after the global financial crisis may have made it harder to stem a credit market panic, a warning that came amid growing stress in corners of the banking sector.
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In a speech that followed weeks of plunging stock prices for global banks and growing concerns that Germany's Deutsche Bank might miss payments to creditors, Fed Vice Chairman Stanley Fischer said the 2010 Dodd-Frank law could both help and hinder efforts to fight future financial crises.
"The new system has not undergone its own stress test," Fischer said in prepared remarks to a closed-door conference in Washington.
Fischer said the reforms enacted after the 2007-2009 crisis had made financial firms more resistant to shocks and reduced the chances they would need to use a Fed program designed to get credit to banks otherwise shut out of lending markets.
But the day will still come when they need it, Fischer said, warning that banks could be less willing to use the Fed's so-called "discount window" because the law now requires the central bank to disclose details of the program.
That marks a "failure to resolve the problem of stigma - that is, the stigma of borrowing from the central bank at a time when the financial markets are on guard," according to the prepared remarks.
"Indeed, some of the Dodd-Frank Act reporting requirements may worsen the stigma problem," Fischer said.The Fed previously released only aggregate figures for this program but now publishes a more detailed report with a two-year lag.
Fed Chair Janet Yellen told Congress on Wednesday that tightening financial conditions, uncertainty over China and a global reassessment of credit risk posed a threat to the U.S. economic outlook, but added that the vulnerability of the U.S. financial system was still "moderate."
The Standard & Poor's financial index <.SPSY> has fallen 14 percent so far this year and banking shares have also dropped steeply in Europe, led by Deutsche Bank.
Deutsche Bank shares were trading sharply higher on Wednesday after the Financial Times reported the banking giant was considering a multi-billion bond buyback.
(Reporting by Jason Lange; Editing by Chizu Nomiyama and Paul Simao)