Cornelius Hurley argues that banks are implicitly and explicitly subsidized, and that they need to return the subsidy.
Dean Baker argues for a transfer tax, and weakening the political power of financial institutions. Really tangential to the point of the conference. I’m not sure it would help or hurt too much. It would drop trading volumes.
Dana Chasin argues for more centralized information analysis to deal with opacity and interconnectedness.
Ron Feldman argues that plans should be made in advance for how to wind up firms, based on what is special about the firms aka “living wills.” Suggests that resolution regimes are too vague.
Tamar Frankel argues that banks should bail out each other, but pay differential guaranty fees based on the riskiness of each bank. I think that would be difficult to pull off, such a strategy hasn’t worked that well for the PBGC (not equally funded), State Insurance Guaranty funds (post-funding), or the FDIC (pre-funded but equal contributions). There are moral hazard and agency problems with this idea.
Personally, I would make the Risk based capital [RBC] percentage rise with the amount of risk-based capital. Say, when RBC gets over $10 billion, the percentage of capital needed for RBC grades up to 50% higher than the level needed at $10 billion by the time RBC gets up to $50 billion.
One questioner suggested unlimited liability for bank shareholders. That sounds like requiring the investment banks to be partnerships.
Another mentioned the trouble with state guaranty funds in the ’80s.
Also, more capital needs to be held against securitized assets versus non-securitized assets.
One commenter suggested making repo funding unsecured. Oh my.
Another guy commented that having subordinated debt as a warning sign did not work in the past.
Another commenter said that liquidity always dries up when you need it most.
There are always a few loonies at conferences, who know nothing about the topic at hand. It keeps things colorful.
At the end of this panel, Heather McGhee of Demos came to talk about Financial Reform in DC. Snapshot:
- Non-compromise Dodd bill coming Monday — no systemic risk regulator, but a systemic risk council.
- Standardization of derivatives trading, clearing, etc. There will likely be end-user exemptions.
- Prudential regulation ~20 big financial companies will be regulated by the Fed.
- New special bankruptcy court — a check to determine illiquidity or insolvency.
- Possible Prop trading amendment — the Volcker Rule, with regulatory exceptions.
- Possible amendment: Size cap on assets, unlikely to get made into law.
- Possible new resolution authority.
Difficult to see how proactive financial services regulation gets enacted… politicians and regulators tend not to be forward looking.
OK, so am I the only one that thinks transaction taxes are ridiculous? It seems to me like they would just be begging for regulatory arbitrage, and movement of trading activities off shore. Sure those things happen off-shore now, but those foreign companies will still end up being owned by the domestic banks. The risks will still be there, we’ll just move the activities out of our jurisdiction, which is not a solution and stops us from monitoring them adequately.
The other part is that this seems like it would hurt the honest people the most. Giant trading operations can always go off-shore, but what about the legitimate transactions? A small importing operation hedging their currency risk, a sewage treatment plant hedging their electricity costs (HUGE) etc. will all have to deal with reduced liquidity and wider spreads, all for no net benefit.
This is not progress.
No rules will help unless we can depend on the regulatory system to hold banks to them. I’d like to see a mechanism by which regulators would be rewarded for discovering and correcting noncompliance; this would assist in preventing regulatory capture by aligning the regulators’ self-interest away from the banks’ self-interest.
I don’t know what the best mechanism to accomplish this would be, though. Perhaps assign many regulators to each bank (proportional to bank size), each of which are chosen randomly (and independently) from a larger pool of regulators. Then, whenever a fine or other damages are imposed due to noncompliance, the regulator responsible for exposure receives a large percentage of the imposed fine.
Hmm, already I see a major flaw in my cunning plan: this would encourage regulators to focus on whatever areas of regulation make it easiest to play “Gotcha” rather than whatever areas contribute most to systemic risk. Can this idea be repaired?
Right now, the bank situation “seems” to be that management enjoys 50% of the upside through compensation and a tiny fraction of the other 50% of the downside based upon whatever stock that they own. The math is extremely simple. If their share of stock is 0.1% of the total, then a deal that has a 1% chance of making $1 billion vs a 99% chance of losing the same has a negative $490 Million expected value to the shareholders but a $4 million POSITIVE expected value to the Management. And worse than that, the stockholder share is contingent upon employee bonuses being positive in total.
As long as that math works that way, the management has every incentive to find ways to work around the system to take outsized risks.
That math is why regulators are starting to call for an independent risk management function reporting to the board. It is an attempt to create a counterweight. A hilariously inadequate attempt though. Setting one person up as standing in the way of billions of bonuses. Regulators need to require funding for body guards as well.