Tags: Natter | Corrigan | Bair | banks

Regulating Large Financial Institutions — Part II

By    |   Friday, 06 Jun 2014 07:36 AM

The subject of regulating "too big to fail" banks is large enough to encompass two panels at an event like the daylong program on bank regulation co-sponsored by the Boston University Center for Finance, Law & Policy and the U.S. Office of the Comptroller of the Currency.

Thus a panel consisting of Gerald Corrigan, legendary president of, first, the Federal Reserve Bank of Minneapolis and, later, the Federal Reserve Bank of New York, which is the nerve center of the operations of the Fed, and now chairman of Goldman Sachs; Sheila Bair, former chairman of the FDIC; and Raymond Natter, a partner at Barnett, Sivon & Natter who served 10 years in the General Counsel's office at the Office of the Comptroller of the Currency (OCC) and once shared an office with this writer as counsel to the House Banking Committee.

Natter defended the role of the OCC in the financial crisis and specifically for doing what this writer has said agency lawyers do, which is to find authority to implement their agendas where it may be lacking.

It would be difficult to overestimate the influence Corrigan had within the Fed, largely because he was the chief theoretician during the chairmanship of Paul Volcker. In that role, he published in 1982 an essay titled "Are Banks Special?" that made the case for those who subscribe to what this writer calls the "cult" of banking that banks should be supported by the federal safety net by virtue of the roles they play as stewards of the payments system, providers of liquidity to the economy when credit is scarce and the transmitters of whatever monetary policy the Fed is pursuing at any given time. The essay was recognized as an instant classic and remains a must for courses in banking. When Corrigan penned it, this writer panned it as obsolete, and the essay has never lost the ability to elicit heated responses from people who work in this field, especially from economists and lawyers.

A third of a century later, Corrigan seems to be going through an agonizing reappraisal as he contemplates entreaties to revise and update the essay, and after considering the effects of changes in the market and in regulatory policy, especially since the 2008 crisis, he thought perhaps this would change his view, but he found that banks are even more special today than they were a third of a century ago.

However, he admitted that it would be difficult to develop this argument, "to square the circle," in light of the changes that have occurred. He is a True Believer. (This writer would argue that the "Banks Are Special" view is even more obsolete than it was in 1982. If Corrigan does rewrite the essay, think tanks, universities and lobby groups will fall over each other to hold symposia on it.)

Bair stated at the outset of her remarks that she believes banks are still "special," at least with respect to their role in administering the payments system and providing "backup liquidity." She went on to question the role of transmitter of monetary policy in light of the aggressive role the Fed has played as it has intervened directly in financial markets. Most of her presentation addressed the question of, given that she thinks banks are special, what kind of regulation is needed, and she finds it lacking, especially with respect to the activities of nonbank entities such as money market mutual funds and derivatives clearinghouses, both of which have added to the risk of another financial crisis.

Bair also warned that the trend toward stressing supposedly liquid assets rather than capital creates a vulnerability to another crisis event because these assets may prove to be hard to value and illiquid under crisis conditions.

(Archived video can be found here.)

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Robert-Feinberg
The subject of regulating "too big to fail" banks is large enough to encompass two panels at an event like the daylong program on bank regulation co-sponsored by the Boston University Center for Finance, Law & Policy and the U.S. Office of the Comptroller of the Currency.
Natter, Corrigan, Bair, banks
633
2014-36-06
Friday, 06 Jun 2014 07:36 AM
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