Fed's Powell says more U.S. regulation not always the answer

NEW YORK (Reuters) - More rules and regulations are not always the best solution to problems in financial markets and U.S. government agencies must take a balanced approach to such decisions, an influential governor being considered to lead the Federal Reserve said on Thursday.

Fed Governor Jerome Powell, seen as a contender as U.S. President Donald Trump considers who might replace Fed Chair Janet Yellen, told a gathering of bankers, lawyers and investors that industry groups can help to “fill in the cracks” left by competing regulations enforced by various U.S. agencies.

He was kicking off a gathering of the private-sector Treasury Market Practices Group (TMPG), a Fed-sponsored body that has proposed ways to clean up bad behavior in recent years, including big banks’ illegal manipulation of the London interbank offered rate, or Libor, and of the foreign exchange spot market.

Regulations require banks “to hold larger amounts of high-quality liquid assets so that they can safely meet their potential liquidity needs,” said Powell, who has long backed the Fed’s tough approach to safeguarding the financial system in the wake of the 2007-2009 crisis.

“There is certainly a role for regulation, but regulation should always take into account the impact that it has on markets, a balance that must be constantly weighed,” he added. “More regulation is not the best answer to every problem.”

Powell's balanced comments could be seen as an outline of his potential approach to running the U.S. central bank. Last week, Trump said he had interviewed four potential nominees for Fed chair, and would make a decision in two or three weeks' time. ( For a graphic of contenders to lead the Fed, see: tmsnrt.rs/2yqJh2I )

Yellen’s term expires in early February. Though she could be re-appointed, she has made it clear she will not turn her back on the raft of U.S. financial reforms that Republicans want to roll back.

The 10-year-old TMPG, including banks and funds and other market participants, had been focused in the last few years on addressing fragility in the increasingly electronic bond markets, including the so-called “flash rally” of 2014 that saw wild swings in prices as buyers and sellers disappeared.

Yet as market volatility has dropped to record lows this year, the group has turned its attention to addressing the misuse of confidential information for profits.

The group’s first recommendation is that market participants are “clear and truthful” in their communications. Further, they should limit the sharing of confidential information; avoid doing so in order to harm other participants or diminish the market’s integrity; and they should be up front about internal rules for handling such information.

The proposals are open to public comment until Oct. 15.

The conference hosted by the New York Fed was not on-the-record aside from comments by Powell. He said the Fed aims to create a “level playing field” and avoid “regulatory arbitrage” - or the playing off various regulators for private advantage - as it ramps up its data collection from banks and dealers.