A Year Later, Non-Bank Regulation Still Needed

A year ago today I wrote about financial regulation . As the G20 meeting on April 2 approaches, the topic is more relevant than ever.

I argued last year that when the last piece of the Glass-Steagall wall between banking and non-bank financial institutions was torn down in 1999, the law should have extended U.S. regulatory authority beyond banking to all the other institutions.

My views were shaped by research I did at the FDIC. I developed a state-by-state credit-quality indicator, based on bank examiners' classification of loan quality at insured banks. The indicator deducted 20 percent of the loan value classified as substandard, 50 percent of loans classified as doubtful, and 100 percent of loans classified as loss. The results were included in an article I wrote with Professor George Benston published in the Journal of Money, Credit and Banking, "Bank Examiners' Evaluation of Credit".

Whatever use a state credit-quality indicator might have had as an early warning system (e.g., of mortgage-quality problems in Arizona, California, Florida and Nevada) disappeared when mortgage loans were wrapped up into securitized packages that were beyond easy classification by bank examiners and were camouflaged by AAA ratings by rating agencies and insurance companies.

The Chairman of the UK Financial Service Authority (FSA), Lord Turner, on March 18 has highlighted for the G20 socially undesirable financial innovation as a key source of the global crisis. He recommends regulation of near-bank activities such as hedge funds and credit-rating agencies, with a Europe-wide financial body to set standards and supervise. The UK seems to have joined the hawkish German and French authorities.

While the United States has been considered a dove on financial regulatory issues. the Obama administration may surprise the G20. Stephen Labaton in the NY Times on Saturday says a plan is being prepared that would

regulate the shadow banking system, with heightened standards put in place after the economy began to rebound. A broad consensus has emerged that hedge funds must be registered and more closely monitored, probably by the SEC.

The U.S. plan will probably give the government greater authority over large troubled companies not now regulated by Washington. The Secretary of the Treasury would have authority to seize a struggling institution after consulting with the president and upon the recommendation of two-thirds of the Federal Reserve Board. The government now can seize only the banking unit that controls federally insured deposits of large troubled institutions.

 

 

Comments

[Sundialsvc4]

12:38 PM on 03/30/2009

I would clarify the above post with this key point: "Is there really a difference between 'The United States Government' and the mega-companies within it?" Not nearly so much as one might suppose. Even when one takes an international view, "is there really a difference between these 'nations' and the mega-companies who call themselves 'multi-national' (when it suits them)?" Again, not really.

So... the realties of the lines-of-power that are being represented at G20 are considerably different from what they might first appear.

But the realities of the PLAINTIFFS in this matter ... are rather well-defined by these national identities.

And today, as a direct consequence of financial high-crime, there are plaintiffs throughout this planet, who have suffered and who continue to suffer grievous injury.

[Sundialsvc4]

12:33 PM on 03/30/2009

The situation that we, as a planet, now face is obviously that of "organized crime." The system that we now have in place is obviously susceptible to manipulation by rogue states ... and any state, even the USA herself, can for these purposes be "the rogue."

The consequences to literally every country in the world, including the citizens of the USA, are horrible and real. Yet the rogues in the USA are unrepentant, clamoring for even more power for themselves.

From an international perspective, the flaw is in the system ... and no single nation, even the USA, can fix the problem even by the most obsequious changes to her own future policy. It is axiomatic that, if any nation is given a big stick (such as, "our currency is the world reserve currency"), it will use that stick. And human nature plainly tells us that it will not use that stick benignly for the public good. We plainly know this about our own human natures.

The present system has produced a body of literally billions(!) of human Plaintiffs. The issues that are to be discussed in London are truly "high crime," and its terribly real human consequences.