Regular readers know that all these complex rules and increases in regulatory oversight are a substitute for the simple solution of transparency and market discipline.
As I have said numerous times, with the exception of the Consumer Financial Protection Bureau and the Volcker Rule, Dodd-Frank should be repealed.
It should be replaced with an Act that brings transparency to all the opaque corners of the financial system. At a minimum, this Act should
- Require that banks provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details. This is the data market participants need to independently assess the risk of the banks and exert discipline to restrain risk taking.
- Require that structured finance securities provide observable event based reporting on all activities like a payment or default involving the underlying collateral before the beginning of the next business day. This is the data that investors need to know what they own.
- For example, banks with deposits to lend can use this data to assess the risk of banks looking to borrow. With this assessment, the interbank lending market can reopen.
- For example, market participants can calculate Libor because they have access to all of the interbank transactions.
How ripe is the moment? Even lawmakers who voted for the 2010 reform law are open to improving it.
"Congress never gets it right, when you're looking at massive reform legislation, the first time through," Sen. Mark Warner, D-Va., told The Hill newspaper last week. "You directionally head in an area and then you come back, two years, three years hence to do a corrections legislation."...
Ammunition for anyone seeking change arrived Monday from Karen Shaw Petrou of Federal Financial Analytics....
Her stark conclusion: even if regulators did everything called for in Dodd-Frank, and did it perfectly, financial services supervision would still be a mess. Throw Basel III in the mix and it just gets worse.
The end-result of numerous agencies pumping out massive rules to meet statutory deadlines will be a tangle of contradictory mandates that will be tough to enforce and impossible to comply with....Please re-read the highlighted text as Ms. Petrou makes the case for restarting financial reform with a simple focus on bringing transparency to all the opaque corners of the financial system.
As I have documented on this blog, simply bringing transparency back to the opaque corners of the financial system will go a long way towards fixing all of the problems that financial reform is suppose to address.
Transparency has one more advantage over loophole ridden complicated regulations that the industry will render irrelevant. Transparency has been shown to prevent a financial crisis in the first place.