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New Statements by Shadow Financial Regulatory Committee

By    |   Monday, 10 Dec 2012 02:58 PM

The Shadow Financial Regulatory Committee, a group of academic critics of federal financial regulatory policies, met Monday at the American Enterprise Institute (AEI) and issued several policy statements.

First, Stanford professor Kenneth Scott read a brief statement opposing the extension of the FDIC's Transaction Account Guarantee (TAG) program, which guarantees business deposits at insured banks and was imposed as a "temporary" measure in October 2008 at the height of that episode of the financial crisis. The Committee objects to the extension on the ground that it undermines market discipline and further encourages banks to fund relatively long-term assets with short-term or even overnight liabilities, thereby further extending the federal safety net.

The Committee then announced three formal statements:

#332 - Regulation of Bank Capital and Liquidity - presented by Bob Eisenbeis of Cumberland Advisors

The Committee supports increasing regulatory and liquidity requirements for too big to fail (TBTF) institutions, as provided under the Dodd-Frank Act and the Basel III capital accords. However, the Committee finds five flaws in the Basel III rules: (1) reliance on fixed, inaccurate risk weights; (2) reliance on standards that are too inflexible to adjust to market conditions; (3) excessive complexity that gives a false impression of precision and adequacy; (4) standards that are too weak under any proper definition of risk; and (5) excessive forbearance by regulators and institutions that fail to measure and respond to asset losses and capital impairment.

#333 - An Open Letter to President Obama - presented by Edward Kane of Boston University

After every election, the Committee sends an open letter to the president, and this year's letter consisted of three principal items:

1. Problems of Dodd-Frank. Intent to "do something," Congress exacerbated the problems that gave rise to the financial crisis, including the policy of TBTF.

2. Subsidization of Housing Activity. The Committee recommends that subsidies be provided directly through appropriations rather than indirectly through government-sponsored enterprises.

3. Hiding Exposure in Opaque Instruments. Managers of giant institutions are able to augment their compensation as supervisors accommodate and even encourage the underpricing of risk.

The Committee elaborated on its critique of Dodd-Frank as not accounting properly for the risks and costs of the programs and for reinforcing incentives to engage in risky activity that increases the risk of future bailouts. Furthermore, the Committee decried the tendency of an expanded safety net to increase concentration of the banking industry, as managers of banks are incentivized to increase the size, complexity and risk exposure at taxpayers’ expense.

In response, the Committee proposes an assortment of measures to contain the risks that the enhanced scope of the safety net entails. However, history suggests that as these letters are written every four years, no administration has actually implemented either these ideas or any other policies that could have contained the crisis at any point.

#334 - Glass-Steagall and the Volcker Rule - presented by Peter Wallison of the AEI

Wallison faults the Volcker rule for placing excessive restrictions on the activities of bank holding companies, which he contend do not have access to the federal safety net that supports the banking subsidiaries. Therefore, “The Committee notes that banks have ample ways to take large risks as the recent financial crisis and the role played by bank investments in mortgages and mortgage-related securities demonstrate.”

Details of the statements can be found at the AEI website.

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The Shadow Financial Regulatory Committee, a group of academic critics of federal financial regulatory policies, met Monday at the American Enterprise Institute (AEI) and issued several policy statements.
shadow,financial,regulatory,committee
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2012-58-10
Monday, 10 Dec 2012 02:58 PM
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