Fed's George links slow recovery to regulatory shortfalls

Fri Nov 16, 2012 9:03am EST

(Reuters) - A top Federal Reserve official on Friday linked the slow U.S. economic recovery and paltry bank lending to post-crisis financial reforms that she said missed the intended target.

In prepared remarks, Kansas City Fed President Esther George largely repeated her past criticisms of the sweeping Dodd-Frank legislation that the U.S. government adopted in 2010 to avoid a repetition of the brutal 2007-2009 financial crisis.

George did not comment on monetary policy or the economy. But she suggested that shortfalls in new regulations, including "stress tests" meant to ensure banks have enough capital and liquidity to withstand another crisis, are hampering the economic recovery.

"The slow nature of this recovery, the limited amount of new lending after more than four years and the continuation of banking issues in some countries may suggest that the actions we took left unresolved problems," George was to tell the Financial Stability Institute in Panama City, Panama.

The stress tests are likely to draw regulator resources away from traditional supervision such as on-the-ground examinations and microprudential supervision, said George, who gains a vote on Fed policy next year.

"While these new supervisory tools have been useful exercises, in the end they may become little more than routine, repetitive steps in satisfying regulatory requirements ... without contributing to a more effective supervisory process," she said.

The U.S. central bank is a key regulator of banks and the broader financial system, and took on more responsibility after Dodd-Frank was passed into law.

(Reporting by Jonathan Spicer; Editing by Theodore d'Afflisio)