Magazine article American Banker

Fed Sees No Sign of Threat in Banks' Derivatives Use

Magazine article American Banker

Fed Sees No Sign of Threat in Banks' Derivatives Use

Article excerpt


WASHINGTON -- In contrast to the Comptroller's Office, the Federal Reserve is not considering restricting the types of derivatives that Fed-regulated banks use, Governor John P. LaWare said Monday.

Recent reviews of lending institutions have reassured the agency that derivatives transactions do not now pose widespread risks to the banking system, he said.

"We don't see banks getting in over their heads," Mr. LaWare said in an interview. "We don't have any evidence at this stage of the game that this derivatives activity has affected the safety and soundness of the banks."

Tough Stance

Last week, Comptroller of the Currency Eugene A. Ludwig gave a surprisingly tough speech about banks' growing use of extremely complex derivatives. In addition, he warned about some banks' inappropriate use of the instruments to take positions in the markets, instead of to hedge. investments.

In his speech, Mr. Ludwig said he was considering restricting national banks' use of some types of complex derivatives, as well as some activities in their proprietary trading operations.

"We have not given any formal consideration of that," Mr. LaWare said. "If, in fact, we do find there has been speculative abuse of the derivatives markets by banks, then indeed we might want to consider something along those lines. But we just haven't seen it."

Until now, regulators have largely sung the same tune on derivatives, calling for greater disclosure and more careful review by examiners. …

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