Thursday, June 9, 2011

Role of regulators at center of bankers' questioning new rules

Bloomberg ran a follow-up article on JP Morgan CEO Jamie Dimon's publicly questioning both whether the new financial regulations were appropriate and the cost of these regulations.

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon’s public questioning of Federal Reserve Chairman Ben S. Bernanke on bank regulatory costs has “thrown down the gauntlet” in the industry’s increasingly aggressive fight to curb higher capital requirements and other rules. 
“They threw out the first ball, now can they play the game?” said William Poole, former president of the Federal Reserve Bank of St. Louis, in an interview yesterday. “How persuasively can Dimon and others make their case?” 
Dimon, head of the most profitable U.S. bank, took an unusual step in pressing Bernanke in a public forum on June 7 on whether regulators have gone too far in reining in the U.S. banking system and are slowing economic growth.... 
Poole, who warned of Fannie Mae’s and Freddie Mac’s risks years before the mortgage giants collapsed and who also supports higher capital requirements for banks, said Dimon had a valid point. Excessive regulation in the U.S. is slowing the economic recovery, Poole said. 
“The issue is whether intellectual leaders across a wide variety of industries, think tanks can be persuaded,” Poole said. “He’s thrown down the gauntlet. Now what is needed are detailed studies of the costs of regulations.”
Actually, Andy Haldane of the Bank of England has already done the detailed studies of the costs and benefits of regulation.  Mr. Haldane noted that the credit crisis cost a minimum of $4 trillion globally.  The costs to the industry of the new regulations are a rounding error by comparison.
An unprecedented bailout of the financial system in 2008 spurred Congress to pass hundreds of rules last year as part of the Dodd-Frank Act. Bank regulators worldwide also are devising new capital requirements.....
Bernanke, 57, said ... the Fed lacks the quantitative tools to study the net impact of all the regulatory and market changes over the past three years. 
“It’s too complicated,” Bernanke said, adding that he thinks there’s a way to safely regulate banks while preserving their ability to deliver “basic financial services.”
If it is too complicated to know what the impact of all the new rules and capital requirements is going to be, then perhaps the regulators should not be pushing forward with all these new rules and capital requirements.

This blog has long suggested that there is a low cost simple solution that allows regulators to safely regulate banks and investors to exert market discipline while preserving the banks' ability to deliver "basic financial services."  This solution also eliminates the need for most of the new rules.

This solution is to fully adopt the disclosure requirements under the FDR Framework.

Adopting these disclosure requirements means that all market participants (including investors, competitors, rating services, equity and credit market analysts and regulators) will have access in an appropriate, timely manner to all the useful, relevant current asset and liability-level data for all financial institutions (broadly defined to include banks, insurance companies, and money managers).
Federal Deposit Insurance Corp. Chairman Sheila Bair, when asked about Dimon’s comments in New York today, defended higher capital buffers for the biggest banks and said U.S. regulators must guard against pressure to ease up on oversight as the nation recovers from the 2008 credit crisis. 
“I see a lot of amnesia setting in now,” Bair said today during a question-and-answer session at the Council on Foreign Relations. “Banks are not doing a lot of lending now, and the ones that are doing the better job of lending are the smaller institutions that have the higher capital levels.” 
Actually, regulators must end their information monopoly on all the useful, relevant current asset and liability-level data for financial institutions and provide this data to the market participants.  This allows oversight of the financial institutions by all the market participants (including the regulators).
“Wall Street has no friends, and the banks have no friends, and Jamie Dimon is out there as kind of a lightning rod when he says things like this,” said Michael Holland, who oversees more than $4 billion in assets at New York-based Holland & Co.... 
Jamie Dimon has raised the issue in a very public forum that people in Washington are part of the problem, not part of the solution,” Holland said in a phone interview. “It’s unfortunate that the environment is so poisoned that people can’t even raise the question.”
Regular readers of this blog know that the financial regulators' information monopoly contributed significantly to the financial crisis.  As a result, doing away with this monopoly should be a major piece of the solution.
“How can [Jamie Dimon] ask this with a straight face?” Grahame Freeland, 62, an accountant in Toronto, said in an e-mail. “Unbelievable hypocrisy, nothing has really changed. This man, who went to the trough on taxpayers’ money, has the nerve to question the minimal controls Bernanke is pushing for!”
 ... “Across the board, there’s still high negative perceptions of big banks and Wall Street among voters,” said Corry Schiermeyer, spokeswoman for pollster IBOPE Zogby International in Utica, New York. “The majorities of voters polled have said they would like to see stronger regulation of the banks.” 
While the regulations might be minimal, the question that needs to be asked is "Are these the right regulations?"

This blog has consistently answered this question what a No.  The reason being that the new regulations and capital requirements do not address the key finding of the Financial Crisis Inquiry Commission.  That finding was that the credit markets froze because market participants did not have the information to figure out for themselves which financial institutions were solvent and which were not.

The closest the Dodd-Frank Act gets to addressing this issue is the creation of the Office of Financial Research.  Unfortunately, the Act is designed to reinforce the regulators' monopoly on the useful, relevant information and not the provision of this information to market participants.

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