Why is additional financial reform finished?
It is no longer politically feasible. All the existing outstanding reform proposals are subject to being crushed by the 'level playing field' argument and its related race to the bottom or are no longer viable under the 'something can not be and be at the same time' principle. These proposals include:
- Higher capital requirements. In the UK, the Bank of England has been pushing higher capital requirements since the beginning of the credit crisis. Recently, David Miles and Adair Turner have taken turns advocating for capital ratios (equity to assets) in the range of 20%.
- Separation of retail and investment banking. In the UK, the Independent Commission on Banking has been looking at separating retail and investment banking in a modern day version of the Glass-Steagall Act. Sir John Vickers, the chairman of the commission, has asked whether it makes sense to ring-fence and separately capitalize retail and investment banks owned by the same financial institution. In theory, the retail bank with its access to the government safety net would be insulated from the failure of the investment bank, but, if the retail bank runs into difficulty, could tap the investment bank for capital.
- Enhanced liquidity requirements. The Basel Committee has been developing liquidity requirements that would make financial institutions less vulnerable to a 'run on the bank'. Potential rules included a requirement to hold up to 30 days of funding in highly liquid, marketable securities like government bonds.
- Breaking up the Too Big to Fail. Looking at the hazard posed by financial institutions that are too big to fail, a number of politicians, regulators and academics have proposed proposed breaking up these institutions into smaller firms that can fail.
- A bank examiner is entitled to see any information that a bank has that the examiner would like to see [at least in the US, there are no restrictions]. The examiner does not need to ask "permission" of the bank where the bank has the option of saying no, we will not let you see that data. (I)
- A bank examiner can see the requested information at the bank or alternatively bring it back to the office for further analysis. (II)
- If the examiner needs help analyzing the information, the examiner is permitted to hire an expert without consulting with the bank that provided the information. (III)
This also suggests that the politics of deciding to create the database are internal to the bank regulators. While the banks will not be happy with the creation of the database, creating the database is consistent with the bank regulator fulfilling its financial stability and supervision mandates.