By CLAUDIA CUMMINS
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. They have consistently sent out reassuring messages, saying they want to ensure they do not stifle financial innovation by taking rash steps to rein in derivatives use.
The comptroller's most recent tone - which an aide said resulted from closer reviews of banks' activities, but which others suggested was posturing - raises the possibility that the agencies' policies may diverge more starkly in the future.
As recently as April 13, when Mr. Ludwig and Mr. LaWare both testified before the House Banking Committee, their messages appeared to be in sync.
The comptroller's stern warnings last week, therefore, were surprising, the Fed governor said.
"It didn't sound like what we heard in the hearing," he said. "Maybe Gene knows something I don't know."
"Our impression is that for the most part, these instruments - and certainly the plain vanilla ones - are being used quite prudently," he added. "We may have one, or two, or half a dozen banks in which we have some concerns."
Asked about the possibility that Fed officials will soon be issuing warnings similar to the comptroller's, Mr. LaWare responded: "I don't think so, not right at the moment."
At the Federal Deposit Insurance Corp., though, reaction to Mr. Ludwig's speech was more positive. According to a senior FDIC official, there is a "significant probability" that restrictions will be imposed on bank derivative activities.
