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Academic
: ConglomerateFinancial Reform Agreement in Congress
By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring
I refuse to be anything but impressed by the financial reform bill that Congress will send to the president. A Volcker Rule? Limits on derivatives trading? The start of the federalization of insurance regulation? There's a lot there. Nonetheless, some quick thoughts:
- With the Volcker Rule (limits on prop trading by banks) and the scaled back ban on derivatives trading, the devil is in the details, and by creating some exceptions to a blanket ban, Congress essentially gave regulators the power to give full, or no, content to these rules. That's either a punt or something that should terrify regulated industry. We won't know until we see the regulations, which makes the mere passage of any bill, but particularly this one, only part of a process of government control.
- Perhaps you all knew this already, but we have a regulated banking sector, and a less regulated (particularly for safety and soundness) shadow banking sector - hedge funds and so on. If you make it impossible for regulated banks to act like hedge funds, you'll increase the amount of capital flowing towards the funds, and shrink formal banking. For my money, that's a trade worth making, but you may differ.
- Banks are worried that our financial institutions will be less competitive internationally. I honestly wonder if the size and power of any country's finance industry, with the possible exception of Canada, has ever varied from GDP and GDP of 80 years ago. Seriously. There are financial centers - Hong Kong does different things from Singapore, for example. But has it ever been the case that the German financial sector has been dwarfed by the Spanish financial sector because of their procompetitive regulation? Or something like it?
- As those of you that followed Sarbanes-Oxley know, financial reform often turns into a grab bag opportunity to pass rules that have been hanging around the legislature for a long time, trying to look like a good idea. The nascent federalization of insurance isn't really a response to the financial crisis (with the glaring exception the AIG, which a federal insurance office will only barely address), nor, it seems to me, is the rule that the SEC should hold stockbrokers to the same standards as financial advisors. But they both found their way into the bill.
Full post as published by Conglomerate on June 25, 2010 (boomark / email).
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