The Wall Street Journal carried an article on US Congressman Jeb Hensarling and his search for a legislative agenda that will a) limit taxpayer exposure to the banking system, b) end Too Big to Fail, c) repeal those portions of Dodd-Frank that are dependent on the combination of complex rules and regulatory oversight with no proof this will enhance financial stability.
Given the goals of his agenda, Rep. Hensarling will find transparency. Specifically, he will find the need to bring transparency to all the opaque corners of the financial system.
Transparency ends our reliance on the combination of complex rules and regulatory oversight that failed miserably in the run-up to the financial crisis. I know former US Treasury Secretary Tim Geithner favored giving regulators a second chance, however, there is no reason to have a single point of failure in our financial system because sooner or later it will fail.
Regular readers know that the global financial system is based on the FDR Framework which combines the philosophy of disclosure with the principle of caveat emptor (buyer beware).
This framework does not have a single point of failure as it makes each market participant responsible for the losses on their investments. Each market participant has an incentive to limit their exposure to what they can afford to lose given the risk of the investment.
For banks, transparency means disclosing on an ongoing basis their current global asset, liability and off-balance sheet exposure details. With this information, market participants can assess the risk of each bank and by limiting their exposure to what they can afford to lose given the risk link a bank's cost of funds to its level of risk.
When a bank's risk and cost of funds are linked, it becomes subject to market discipline. Market discipline that will force the TBTF banks to shrink. Market discipline that will limit taxpayer exposure to the banking system.
No comments:
Post a Comment