Former head of Merrill Lynch Wealth Management Sallie Krawcheck says regulators are barking up the wrong tree.
"If regulators engage with the banks and regulate topic by topic – to stop this exact scenario from repeating itself – Wall Street will innovate businesses and trades that overtake their efforts every time, in search of new pools of profitability," Krawcheck writes in the Financial Times.
"Instead, regulators should turn their attention to the issue of understanding how much risk the banks are taking in total, fixing the measurements of risk that have fallen short and then making certain that banks have enough capital to support that risk."
The JPMorgan Chase $2+ billion loss provides the regulators with a real-world opportunity to assess one of their most important initiatives, stress tests, says Krawcheck.
In addition, Krawcheck wants regulators to complete the unfinished business of re-regulating the credit rating agencies.
“While rating agencies’ intentions are no doubt very good, any business being paid by the Wall Street firms themselves risks, over time, working for the master who pays them,” she says.
Finally, Krawcheck wants regulators to be candid with themselves, disallowing activities too complex for their risk models and stress tests to measure.
“We need to shift the conversation in a fundamental way,” Krawcheck says. “A lot of work is still to be done on bank risk, but—in a world in which bank runs can happen with amazing rapidity, with a few clicks of the computer mouse in the middle of the night, by a shaky public—the stakes have never been so high.”
Former senior financial regulator and a white-collar criminologist William
K. Black says JPMorgan Chase can be considered a systemically dangerous institution, which means that it is "too big to fail" because the government fears that its collapse would cause a global financial crisis.
“Banks are more efficient when shrunk to the point that they can no longer
endanger the world economy,” Black writes at CNN. “But because JPMorgan and similar banks are the leading contributors to Democrats and Republicans, neither political party has the courage to order them to reform."
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