Reregulation: The First Real Shot Of The War

Finally someone has come out with a comprehensive idea of how to deal with reregulation. The WSJ Real Time economics blog has some of the details, but the official version doesn’t come out until tomorrow. The people behind it are impressive so it should at least get some play for a little while, at least until the politicians and vested interests start pecking away.

Anyway, here from the WSJ site is the summary of the proposals:

1) Keep two or three regulators for the financial system – the Fed, a new U.S. Financial Services Authority, and an investor and consumer protection agency. The USFSA “would regulate all aspects of the financial system, including market structure and activities and safety and soundness for all financial institutions.”
2) Mandate centralized clearing of credit default swaps. To the extent that some CDSs stay outside a centralized clearing process, the committee calls for higher capital requirements to “compensate for increased systemic risk of these contracts.”
3) Don’t make a hasty decision to raise capital requirements across the financial sector until more analysis is done. But the committee does recommend higher capital requirements for megabanks, such as those with more than $250 billion in assets. “Given the concentration of risks to the government and taxpayer, we recommend that large institutions be held to a higher solvency standard than other institutions, which means they should hold more capital per unit of risk.”
4) Strengthen the “leverage” capital ratio, and debate whether the leverage ratio should be based on common equity rather than total Tier 1 capital.
5) Give the Fed temporary authority to evaluate confidential information supplied by hedge funds.
6) Relax acquisition rules to make it easier for private equity firms to pump money into the banking sector.
7) Create a comprehensive policy called the Financial Company Resolution Act, that would be allowed to put any financial company into receivership, not just “systemically” important ones.
8) Ban or limit high-risk mortgages from being securitized. (Sorry about the smiley face. I can’t get rid of it. You can figure out this is point 8, can’t you. Please tell me you can).

I’ll go through my initial reactions but I reserve the right to change my mind.

  1. I like this. Keep it simple.
  2. Again it gets my vote. The only quibble is that I would prefer to see no bespoke deals outside of the clearinghouse until we are more comfortable about controlling these things. But if you can make it expensive to do the customized deals, then that’s a reasonable fallback.
  3. Amen. Don’t be in a hurry. Don’t know about penalizing bigger banks but if we take our time we may figure out a reasonable solution.
  4. Again I agree. Anything to get the leverage out of the system.
  5. I have a problem with this one. Nothing stays confidential anymore. The hedge funds didn’t cause any of the problems and they certainly have held up better than just about anyone else. This one needs some work.
  6. PE has no place in banking. Relaxing the rules means turning over power in the financial system to commercial companies. See my post here.
  7. Yes, we do need to revamp the rules to allow for a legal process to put financial firms into receivership. This one needs to be thoroughly debated.
  8. This one sounds really political. I guess it depends on your definition of high risk mortgages. Some nanny state implications here but that’s a discussion for another post. (Sorry about the smiley face, it’s supposed to be number 8. I can’t get rid of it. I trust you can figure it out.)

I can’t wait to see all 57 pages of this one. Oops, it’s probably longer. There are evidently 57 pages of recommendations. Fascinating stuff!


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