Former Fed chairman Paul Volcker is calling for a reform of the U.S. financial regulatory system. This article (link here) outlines his plans for a new framework.
Volcker stated that "the underlying problem is the growth of the non-bank part of the system". These "shadow banks" are allowed to avoid the regulatory requirements banks are subject to.
Critics like Volcker say the patchwork system breeds "regulatory arbitrage," allowing banks and other financial institutions to shop for the regulator that will be the most lenient. Turf fights among agencies, conflicting priorities and overlapping authorities prevail, they say.
Under Volcker's plan, the Fed would continue to still have the primary responsibility of ensuring financial stability, but it would be less concentrated in one agency.
Some of the main points of Volcker's plan are as follows:
1) Bank oversight would be carried out solely by the Prudential Supervisory Authority, rather than the three agencies currently sharing the task
2) The Office of the Comptroller of the Currency would be eliminated completely
3) The Securities and Exchange Commission would be merged with the Commodity Futures Trading
Volcker's plan for reform seems very drastic, and, as the article states, more than 25 proposals like this have been made since World War II without success.
Should these reforms be implemented? Is it finally the right time for a reorganization to this extent? Will reorganizing regulation make it any better or will it just shift the problems around?
Wolf discussed shadow banks in section two of his book. Originally, the system was considered revolutionary as it created a financial system that performed the functions of conventional banking without the vulnerability to as many risks, since it lacked a lender of last resort and a competent regulator. Shadow banks are presently growing in numbers, and regulation over them is being tightened, in fear of safer banks but a less safe overall financial system. This tightening I am okay with and think it is good. In term's of Volcker's entire argument, it seems possibly over the top? I agree in attempts to mitigate risks that make us vulnerable to crisis, but his proposal is hefty. It's unfortunate that our system can't just be more transparent and open regarding regulation, thus eliminating some risk.
ReplyDeleteI would agree with both Cam and Kate that Volcker's reforms seem overwhelming and perhaps over the top. I would argue, however, that regardless of whether or not Volcker's policy changes are made, there will be no small fix to the financial system. As we have seen throughout the quarter so far, the problems of the financial system are widespread so any type of solution will most likely need to be large and widespread as well.
ReplyDeleteI agree with Cameron and Bronte.I found the article interesting and, enjoyed reading it. That being said, I think that issue with the financial system should be examined from a more international spectrum. Personally, I think that approaching the issue of the financial system in a more global spectrum, like Bronte mentioned, help to solve the root of the problem.
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