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Thursday, March 22, 2012

Deutsche Bank escapes from Dodd-Frank

The Wall Street Journal ran an article that describes how Deutsche Bank avoided having to comply with the Dodd-Frank Act by simply changing the legal structure of its US operations.

By making this change, the bank reduced both the amount of capital it will have to hold to support its US operations and regulatory supervision.  Another stake through the misguided notion of having the market rely on either meaningless bank capital or the regulators.

Perhaps more importantly, it made the SEC its primary US regulator rather than the Federal Reserve.  Readers will recall that prior to the financial crisis, the SEC was the primary regulator for Bear and Lehman.

At a minimum, what this action by Deutsche showed is how easy it is for the global financial institution to game the new bank capital and regulatory infrastructure.

Regular readers know that ultra transparency applies globally and is not subject to this type of gamesmanship.

Under ultra transparency, banks are required to disclose on an on-going basis all of their current asset, liability and off-balance sheet exposure details.  Ultra transparency needs to apply across the entire organization if there is to be market discipline.  After all, how can the market assess the risk of a firm if it sees less than 100% of its exposure details?

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