Volcker’s “Group of 30″ released its report today on suggested reforms for financial markets. The full 80 page report has to be purchased for $49. They did release a shorter version containing the group’s major recommendations.
- “All systemically significant financial institutions, regardless of type, must be subject to an appropriate degree of prudential oversight.” [this would include investment banks and insurers]
- “Large, systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks and serious conflicts of interest…” [Prop trading should be outlawed entirely for commercial banks. They've got their hands full just measuring the credit risk of their loan books.]
- “To guard against excessive concentration in national banking systems…limits on deposit concentration should be considered at a level appropriate to individual countries.” [Too bad the government's chosen method for resolving failed banks is to kick their assets upstairs to a bigger balance sheet, concentrating deposits even more. E.g. B of A---Countrywide, JPM---WaMu and Wells Fargo---Wachovia.]
- Money market funds have to reorganize as bank holding companies if they wish to offer transaction services and make claims about “stable” NAVs. Those wishing to remain mutual funds can’t promise not to break the buck and their NAVs should be forced to fluctuate via new accounting rules.
- Hedge funds and other “private pools of capital” that employ substantial leverage should register and be subject to regulations. Any so big as to be judged “systemically significant” should be subject to capital, liquidity and risk management “standards” as established by their regulator.
- GSEs: hybrid public/private entities should be done away with.
- Regulations and Regulators need to be improved
- Central Banks should be assigned a role in promoting financial stability, not just during times of crisis, but also during times of “rapid credit expansion and increased use of leverage that may lead to crises.” [Overall this section is very weak. Cutting down use of leverage can lead to instability in the price level, i.e. deflation, which central banks are also charged to avoid. You can't give central banks all these conflicting mandates and hope they'll just work it out. This is a key argument of gold standard advocates: central banks can't be trusted to handle all these mandates, better to rely on hard currency.]
- International coordination among regulators needs to be improved, including more robust definitions and reporting of leverage.
- “Institutional policies and standards must be strengthened, with particular
emphasis on standards for governance, risk management, capital, and liquidity.”
- Boards need more independent directors with risk mgmt expertise, and risk mgmt should be included in compensation policies Credit concentrations, maturity mismatches, excessive leverage, liquidity need to be reviewed “periodically.”
- Credit exposures to large counterparties must be monitored more closely
- Regulatory capital standards need to be enhanced and “well capitalized” benchmarks should be raised.
- Fair value accounting principles need to be “reevaluated.” Hmmm…
- “Financial markets and products must be made more transparent, with better-
aligned risk and prudential incentives. the infrastructure supporting such
markets must be made much more robust and resistant to potential failures of
even large financial institutions.”
- Securitized credit markets must be more transparent. Transaction volumes, holdings, credit and leverage elements all need to be monitored more closely.
- To restore confidence in securitized credit markets credit underwriting standards must be improved. Institutions must retain meaningful portion of credit risk of the securities they are packaging and selling to investors. [This sounds good, banks should eat more of their own cooking. But aren't we learning that banks DID retain plenty of credit risk on their books (leading to never-ending writedowns)? That didn't stop them from taking the credit risk anyway.]
- “Off-Balance-Sheet Vehicles: Pending accounting rule changes for the consolidation of many types of off-balance-sheet vehicles represent a positive and needed improvement.” [I've never heard a convincing argument as to why "off balance sheet" structures are even allowed to exist. Haven't we learned enough from Enron, SIVs, etc. to just outlaw them?]
- Rating agencies need better payment models to eliminate conflicts of interest
- OTC derivatives markets (like CDS) need to be regulated formally.
I wish there was more emphasis on fundamental structural reform (abolish central banking perhaps?) as opposed to simply more regulations (which can be badly applied by regulators or otherwise got around by those regulated).