KANSAS CITY, Mo. — Kansas City Federal Reserve President Esther George says she never meant to be a contrarian, but out of the 13 votes she has cast as a member of the Federal Open Market Committee since 2011, 10 have been against the majority.
"It's not to be disagreeable, but it is to say I'm willing to disagree if I can't be convinced or if I see the issues differently," she said.
But as a former bank examiner and career employee of the Kansas City Fed, George has strong views on other subjects besides interest rates.
In an interview with American Banker, George said she remains skeptical of the efficacy of the post-crisis regulatory regime to prevent another crisis, and suggested that capital levels for the largest banks still need to be substantially higher. She also believes that the regulatory burdens faced by community banks are still far heavier than those facing the largest banks, and pushed back on suggestions that the Fed's structure is contributing to a lack of diversity in leadership roles.
Following is an edited transcript of that conversation.
The New York Times called you a
ESTHER GEORGE: No. A dissident strikes me as someone who's more dogmatic — that you've carved out a space for yourself. What I see myself as is trying to be as honest as I can — to understand the issues, and to be willing to say, out of respect for you, for those I feel like I represent, "This is how I see the issue." It's not to be disagreeable, but it is to say I'm willing to disagree if I can't be convinced or if I see the issues differently. So, if that's a dissident, then I suppose from time to time…
Or a "hawk"?
I don't know what that means, either. As you paint those continuums, what in life really falls on those continuums? Does a hawk mean, at all costs, I will want hard money, that I would want high rates? No. So, I'm willing to lean to say, 'How do I see the real economy taking this policy?' and based on how I understand what our objectives are.
Do you think there is still time to normalize interest rates before another crisis strikes, or have low rates distorted the market too much?
We don't know — we can't know that. And that's why you have to use your best gauges. And one of the gauges is, you have to have a forecast. If you know decisions you make today operate with a lag, you have to have some understanding based on how much I trust the data I've seen to make a forecast of where I think the economy is going. You have to be willing to adjust if it doesn't turn out that way. But to gauge if you're too soon or too late — by the time you know that, you have waited too long. We don't want to find ourselves there. So I can't know if we have plenty of time. What I can see is, the two metrics we often use — employment and inflation — I make a forecast based off of those, and those suggest to me that now is a good time. And I thought 'now' was good going back earlier this year, to say things are moving in a way that a small, gradual move would be consistent [with the Fed's objectives].
The honest thing you have to do at that table is not to try to second guess what markets will think, but if I can be clear in my public speeches, and I can be clear when I talk to people about how I think about it, then I have to be consistent with how I see the issue.
Your district is dominated by community banks. Do you think things are improving for them? What do you think about efforts to tailor rules to avoid impacting small banks?
They are under tremendous pressure --low interest rates, they are taking more duration in some cases to try to overcome that. They are trying to figure out how to comply with increasing expectations around consumer compliance, around many of the rules that exist today. And I don't think it's a stretch to say they bear that cost disproportionately relative to the risk profile of what they do. And so I expect you're going to see more pressure to consolidate.
Small banks are trying to compete. Look at the last 30 years at what's been happening to the smallest banks. We are concentrating the industry into the largest banks; [small banks] are losing market share. You'll hear small banks talk about credit unions as competition, but look at the market share of credit unions over that 30-year period. It's barely budged. So small banks aren't losing their market share there, they're losing it to larger banks.
You don't see any new entrants coming into this market, do you? And any industry that's not bringing in new entrants bears watching.
Do you think financial technology is going to move the dial in terms of expanding access to financial services? How might it affect smaller banks?
It will help some. It will cause others to become irrelevant. This is what we know about technology — it can be disruptive, and we see this in many industries. So I think where technology takes us will depend on how you harness what it can do. We see some community banks that are partnering, taking advantage of more online lending activities or participating with us on the payment side with our faster payments work, and security around that. So I think it's not necessarily a function of your size, but a product of how you frame your strategy and what you're trying to deliver to your customers. I think it depends.
I think there's a lot we don't know. Under "fintech", what are we talking about here? Who does it help and who does it hurt? Anytime there's a shift in the industry or a technology, it's hard to know.
You've been critical of certain aspects of Dodd-Frank and Basel reforms in the past — about countercyclical buffers, for example — but how do you view post-crisis regulatory reforms as a whole?
It's very complicated. And anything that gets complicated, it gets harder to tell if it's effective. So we'll have to wait and see.
Do I think shining a light on capital is important? Absolutely. The attention on needing more capital in these very large banks has been positive. But if you ask me whether it's enough, have we arrived at the right [place], I'll go back to the point I raised earlier: at the end of the day, if I'm thinking about an institution that could fail, where's its cushion? Its cushion is going to be shareholder equity. I see less of that in the largest banks than I do in the smaller and midsized banks. That makes me question whether we have done enough. I don't know if [capital levels] have to be the same, but I'm not sure half as much makes me feel like we've fixed that. Did we need to bring more discipline around some of the other aspects of large bank supervision? Absolutely.
I'm not critical of Dodd-Frank as a response. I just think that in the long run … you need to think about what is it in these largest institutions that could be the best regulator of risk? And I think you're probably going to come down to saying that the capital buffer is probably your first [choice], along with making sure they operate in a safe and sound manner. And remember, the way they're supervised and the way I supervise a little bank in Ellsworth, Kan. [population 3,120 — Ed.], look very different.
That kind of sounds like what Minneapolis Fed President Neel Kashkari has been saying about how the largest banks are still "too big to fail."
Look at what the Fed and FDIC told us about the resolution plans. That was the thing this law was really hanging its hat on, right? This was supposed to be thing that would tell us, "They've done introspection; they've been able to demonstrate to the FDIC and the Fed that we've been able to have orderly resolution." Those agencies haven't told us that yet. So absent hearing that … either this is going to take a number of iterations — to what end? And then you hope we don't have a shock in the middle. I think it would be naïve to say we've fixed "too big to fail." I know people are working hard on it, and I don't mean to say no one is trying, but I would not try to convince people of something that we don't have evidence to support.
So two things out of all that legislation: I look at capital and I look at those resolution plans. Have we arrived there? I think in both cases the answer is not yet.
Do you think that the "iterative" living wills process, as you described it, will ultimately yield credible resolution plans?
I guess I'm skeptical. I don't know how many hundreds of thousands of pages these things are, but I think these are complex institutions and I think … their incentives are not around [determining] how to fail smoothly. They're trying to do something else, right? They're trying to return [value] to shareholders and other things. So I really think it's on the banking agencies to say can these work or not, and so far I think they're having a hard time proving that out.
So what should be done?
The incentives around the size and complexity have to be addressed, and that's where I go back to capital. I think if you hold a sufficient amount of capital, it causes shareholders to ask, "How do we want to organize this institution? How are the incentives for the kinds of returns we want?" And so that's where I would start.
The metrics we have around think about funding, I think those have all been reasonable. We had risk there about runnable kinds of deposits. That's what bank examiners do, that's what I used to do around banks that were a fraction of this size. You're always looking for the uninsured deposits, and where the risk could be around that.
I think many of those things move in the right direction, but … you see already, across the world: They don't want higher capital. This is being painted as discouraging growth in the real economy, or it discourages lending. I don't buy that either. I think some of our banks with the highest capital have shown some of the greatest loan growth. And I'd rather see us work off an industry that starts from a position of strength.
What do you think would be a more reasonable capital ratio?
That's a great question. I'd like to see people spend a little more time thinking about what that should be. So one of the things we've done here with our banking economists is asked, if you look at before there was deposit insurance -- so just a strict market demand [for capital] — we saw capital levels of 10% and higher at that point. Once deposit insurance got introduced, some of these safety nets, that began to ratchet down.
I came up as a supervisor in a period where it was thought that market discipline would take care of [risk]; we didn't need to supervise so much. That proved not to be the case.
I think best you can do now is look. You may have seen a chart that Tom [Hoenig, Vice Chairman of the FDIC and former President of the Kansas City Fed] puts out, the
Both parties have unveiled platforms seeking reforms at the Fed. Broadly, are changes warranted at the Fed?
The irony is we are a decentralized institution. We're an institution that is [designed] to connect across this very broad public. Does the public have a right to say, "Gee, in 100 years you've never had an African-American Fed President?" Of course. And that would cause me to ask what it is about our processes here that we should take another look at to see if we would get different outcomes.
I think the same with monetary policy. I think it is our responsibility … not just to be more transparent, but to be clearer. How can we better express that? Yes, there are monetary policy rules that we take into consideration, or how we report to Congress. I think those are the kinds of things, as an institution … that we talk about.
