Overall, the country will be in better shape if the regulatory reform proposals put forward by the Obama Administration were enacted than if we were to do nothing.
There are many good aspects to it. In particular, the creation of a financial products safety board is long overdue. However, much of it looks like merely shuffling around the organizational chart.
Vesting the Fed with overall systemic risk regulation is questionable, but there is a clear need for one agency to do the job, and the Fed is probably best positioned to do it. The questions come from its not very sterling record as a regulator leading up to this crisis (it did a better job of monetary policy in reaction to the crisis, so I’m not just being a Fed-basher here).
The only other existing agency that would be a viable candidate for the job would be the FDIC, but they sort of have their hands full at the moment. Thus I understand why the Fed was chosen for the role.
My overall concern is that the regulations do not go far enough. While there will be more stringent oversight of the “too big to fail” (2B2F) financial institutions, I would have greatly preferred steps to make sure there are not institutions that are 2B2F in the future. There is no reinstitution of Glass-Stiegel. There will be higher capital and liquidity requirements for 2B2F institutions (now formally called Tier One Financial Holding Companies).
This does mean that there will be less leverage allowed, and thus less potential upside at firms like Goldman Sachs (GS) and Wells Fargo (WFC). However, it is unlikely that the requirements will be so high that these institutions decide to break themselves up to avoid being 2B2F.
Also keep in mind, that when the proposals get to Congress, the bank lobby will be out in full force. They will use their power of the purse (massive campaign contributions to key Congressmen and Senators) to make sure that the regulations are significantly watered down by the time they become law.
Probably within a few years, the new regulatory boxes will be filled again with regulators to the big banks’ liking, and will be captured. It is thus highly likely that we will face a repeat of the financial crisis in another 10 to 15 years.
The proposed regulations lower the odds of that happening a bit, but not far enough. The more the bank lobby gets its teeth into it, the higher the odds are that nothing significant will change, and the powers that be on Wall Street will once again walk off with all the marbles, while the rest of the economy gets to subsidize them when they screw up.
Read the full analyst report on “GS”
Read the full analyst report on “WFC”
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