WFC Wells Fargo and Company

If made New York Fed boss, Williams would probably continue policies incumbent set

By Ryan Tracy 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 29, 2018).

The front-runner for president of the Federal Reserve Bank of New York has a regulatory record similar to its current leader, suggesting his appointment would bring continuity in the regulator's relationship to Wall Street.

John Williams, the Federal Reserve Bank of San Francisco president in line for a transfer to New York, and current New York Fed President William Dudley have both supported restrictions on banks imposed after the 2008 bailouts, criticized bank executives for risk-management failures, and sought to put distance between their staffs and the bankers they oversee.

They also have seen major bank misbehavior occur on their watch. Mr. Williams's role in overseeing Wells Fargo & Co. triggered criticism of his regulatory record because of the California-based bank's risk-management failures and customer abuses.

When the Fed hit Wells Fargo with an unprecedented enforcement action this year, it was both a rebuke of the firm and an acknowledgment that regulators had allowed risk-management deficiencies to fester.

As San Francisco Fed President, Mr. Williams oversees teams of bank examiners responsible for firms including Wells Fargo. In a March 2017 Wall Street Journal interview, he said the bank's phony-accounts scandal, fueled by a sales culture heavily focused on getting customers to sign up for more services, showed the bank had broad problems that many observers missed.

"Supervision is not just, again, about stress tests and capital, but it's also about the management, the governance, and culture," he said. "Clearly in the Wells Fargo case, the culture was part of the problem. What's striking, of course, is Wells Fargo is well-known to, thought to, have had a very strong culture."

The Fed's governing board in Washington writes bank rules and signs off on major decisions involving individual firms. The Fed's 12 regional reserve banks across the country enforce the rules for private-sector banks in their area. The New York Fed is especially powerful given New York's outsize importance in finance.

The Fed also shares regulatory responsibility with other U.S. agencies. San Francisco Fed examiners watch Wells Fargo's holding company, while the Office of the Comptroller of the Currency examines the firm's taxpayer-insured bank and the Consumer Financial Protection Bureau audits its retail businesses. All three were caught off guard in recent years by the extent of Wells Fargo's problems.

The San Francisco Fed is currently relocating its bank examiners' primary workspace, moving them from posts inside big banks to regulatory offices, a spokesman said recently. That follows a similar action Mr. Dudley took amid criticism that New York Fed examiners were "captured" by bankers they oversee.

Here are some other things Mr. Williams has said about regulatory policy.

On Postcrisis Regulations

Mr. Williams in August 2017 praised strict rules on big banks, while also saying that rules on small and medium-size banks were too strict. Mr. Dudley and other Fed officials have made similar statements.

"We really need to make sure that the largest banks have lots of capital, lots of liquidity," he said. "You don't need to have this huge burden on smaller banks."

On Bank Culture

Mr. Dudley has said Wall Street firms need to change their culture, pointing to market manipulation and other scandals. Bankers, he has said, need to make sure their employees don't have incentives to take excessive risks.

Mr. Williams in the March 2017 interview expressed a similar view. "What we've learned over and over again is when the incentives are just so skewed, [that is going to] have a negative effect on culture and have negative consequences," he said.

On the Regulation of Financial Technology

"It's not that regulators are here to call the cops on the party; we're here to make sure no one jumps off the roof," Mr. Williams said in a 2016 speech about the benefits and pitfalls of financial innovation. "It's important that we have a level playing field, regardless of how institutions prefer to describe themselves or what kind of charter they hold. As a matter of principle, if it walks like a duck and quacks like a duck, it should be regulated like a duck."

On the Fed's Role in Keeping the Financial System Stable

Mr. Williams said in 2015 the Fed should use monetary policy to stabilize the financial system only as a last resort, after first trying regulatory measures. He pointed to U.S. regulators' crackdown on leveraged loans to heavily indebted companies as an example of how regulators should address financial-stability risks.

"We should instead supplant the focus on individual institutions' financial soundness, based on traditional measures of regulatory capital, with a more systemic view of the financial system's overall health," he said.

Write to Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

March 29, 2018 02:47 ET (06:47 GMT)

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