What all this amounts to is an unintended and unanticipated extension of the official “safety net”, an arrangement designed decades ago to protect the stability of the commercial banking system. The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted. Ultimately, the possibility of further crises – even greater crises – will increase.
Former Federal Reserve Chairman Paul Volcker is testifying before the committee on Banking and Financial Services today at 9am.
His written statement advises against a return to ”business as usual,” and makes specific recommendations as to what to do to avoid another meltdown.
• Reaffirm the principle separating banking from commerce as our approach to financial regulation;
• Regulate Derivatives as a typical financial product;
• Encourage more prudent compensation practices;
• Close existing loopholes that inevitably weaken prudential safeguards;
• Register and establish reporting requirements for hedge funds and private equity;
Volcker also notes two other key needed elements in need of reform: the Moral Hazard of the bailouts, and the ongoing policy of “Too Big To Fail.”
And, Volcker also emphasized the importance of the Federal Reserve maintaining independence from political pressures.
He also called for a new “resolution regime” for insolvent or failing non-bank institutions of potential systemic importance. Rather than toss trillions at these self-wounded entities, we should instead appoint a special “Conservator” to take control of a bank in clear danger of defaulting on its obligations.
The Conservator should have the authority to negotiate an exchange of debt for new stock to resolve the near insolvent firm, to arrange a sale or merger, or, to arrange an orderly liquidation.
This authority would preempt normal bankruptcy/reorg, justified only by the risk of systemic breakdown.
Last, Volcker emphasized the need to coordinate with other major countries on a global approach to oversight of international banking organizations.
Now that is regulatory change I can believe in . . .
Statement of PAUL A. VOLCKER
COMMITTEE ON BANKING AND FINANCIAL SERVICES
OF THE HOUSE OF REPRESENTATIVES
SEPTEMBER 24, 2009