Dodd-Frank Together With Stigler's Ghost
The New York Times finally published Gretchen Morgenson's article, pointing out that Dodd-Frank enshrines rather than eliminates "too large to fail," though systemic "designation" of "financial utilities" such every bit the exchanges has been underway since the bill's beginning. Needless to say, this has been my sentiment all along.
Today let's motion on. I'll label the bigger problem, "too large to neglect agency every bit good large to compete." TBTF=TBTC. There, nosotros tin give the sack pose that on bumper stickers.
As the Ms. Morgenson figured out, the Chicago Mercantile Exchange is at 1 time every bit good large to fail, as well as volition hold upwards able to borrow from the Fed as well as larn a bailout. But that's non the large issue. The CME is at 1 time every bit good large to compete. Who tin give the sack at 1 time start a novel exchange, maybe offering to a greater extent than protection against high frequency traders or other conveniences to customers, as well as threatening the CME's client base? Not against a protected "financial utility."
George Stigler taught us that regulators are prone to "capture." Over the years, regulators start to empathise amongst the manufacture they're regulating. Next matter you lot know, the regulations halt upwards existence used to protect the manufacture from competition. Luigi Zingales' great novel book calls it "crony capitalism," emphasizing that it, non every bit good much benevolent authorities or every bit good much ufettered marketplace competition, is the master copy feature of our society.
This is non an aspersion on the morals of the people involved, who are unremarkably really good meaning. But if you lot pass most of your days talking to manufacture people, non consumers, for your entire career, it's pretty natural to presently larn the see that your labor is to assistance industry. And all the "jobs" it provides. You larn the idea. If you're living on a authorities salary, as well as ties to the regulator volition hold upwards worth huge amounts inwards manufacture when you lot quit, it's fifty-fifty to a greater extent than natural.
Stigler would say us that simple, clear regulations, as well as situations where the regulator doesn't see the same people over as well as over again, are less amenable to capture. Huge, complex regulations, whose wording gives regulators groovy discretion, as well as regulators who see the same people over again as well as again, pose the most danger for capture. Inviting regulators to pass thousands of hours sitting downwards amongst the regulated firms to write detailed complex rules, which deeply touching on what those firms as well as their competitors tin give the sack create is asking for problem on a cosmic scale. I don't stimulate got to say you lot where Dodd-Frank lies on this spectrum.
Worst of all, the master copy point of Dodd-Frank "regulation" is to brand for sure that regulated fiscal companies don't lose money. If the regulators are imposing large costs on the banks as well as other institutions, but are charged amongst making for sure they don't lose money, how volition they mayhap avoid structuring regulations to assistance subsidize the manufacture as well as avoid "wasteful" competition, or upstart competitors siphoning away profitable lines of business? TBTF=TBTC.
The "stress tests" are a proficient example. Will the Fed pose out rules for the stress tests, thence that banks tin give the sack know what's coming? No. The Fed staffers know that if they write rules, as well as then the banks volition game merely about them as well as the tests volition ever pass. So, the Fed comes upwards amongst something novel as well as interesting for each stress test. The fact that fiscal institutions volition game their way merely about rules is what leads to the huge regulatory discretion nether Dodd-Frank.
This would hold upwards fine..except that billions of dollars are hanging on the outcome. Like whether B of Influenza A virus subtype H5N1 gets to pay dividends. Really, how long tin give the sack a small-scale grouping of Fed staffers remain uncaptured playing a game similar that? A regulator amongst groovy discretion is the easiest to curvature to industry's wishes.
Capture does non locomote on correct away. Zealous immature regulators wade inwards to write rules as well as cook the world. Capture happens over years of haggling, people moving inwards as well as out of manufacture as well as regulatory body, networks of friendships as well as personal relationships springing up. That hasn't happened yet. But if the scheme is ripe for capture, it would hold upwards amazing if this 1 fourth dimension inwards all of history the capture did non result.
I latterly toured the Fed's website on fiscal reform. The Fed is remarkably transparent most all the things it's doing to "implement" Dodd Frank. (Is this a plea, "this is non our idea, don't brand us create all this crazy stuff?") 2/3 of the Dodd-Frank regulations have nonetheless to hold upwards written. So select grip of Stigler's ghost, as well as let's read what the Fed is upwards to. As you lot read, think, "How much coin is at stake inwards this rule-making?" as well as "could this procedure mayhap larn captured?" Also ask, "Just how much of this is absolutely necessary to halt some other fiscal crisis?"
Influenza A virus subtype H5N1 Random Sample of a Fed Staffer’s day:
Today let's motion on. I'll label the bigger problem, "too large to neglect agency every bit good large to compete." TBTF=TBTC. There, nosotros tin give the sack pose that on bumper stickers.
As the Ms. Morgenson figured out, the Chicago Mercantile Exchange is at 1 time every bit good large to fail, as well as volition hold upwards able to borrow from the Fed as well as larn a bailout. But that's non the large issue. The CME is at 1 time every bit good large to compete. Who tin give the sack at 1 time start a novel exchange, maybe offering to a greater extent than protection against high frequency traders or other conveniences to customers, as well as threatening the CME's client base? Not against a protected "financial utility."
George Stigler taught us that regulators are prone to "capture." Over the years, regulators start to empathise amongst the manufacture they're regulating. Next matter you lot know, the regulations halt upwards existence used to protect the manufacture from competition. Luigi Zingales' great novel book calls it "crony capitalism," emphasizing that it, non every bit good much benevolent authorities or every bit good much ufettered marketplace competition, is the master copy feature of our society.
This is non an aspersion on the morals of the people involved, who are unremarkably really good meaning. But if you lot pass most of your days talking to manufacture people, non consumers, for your entire career, it's pretty natural to presently larn the see that your labor is to assistance industry. And all the "jobs" it provides. You larn the idea. If you're living on a authorities salary, as well as ties to the regulator volition hold upwards worth huge amounts inwards manufacture when you lot quit, it's fifty-fifty to a greater extent than natural.
Stigler would say us that simple, clear regulations, as well as situations where the regulator doesn't see the same people over as well as over again, are less amenable to capture. Huge, complex regulations, whose wording gives regulators groovy discretion, as well as regulators who see the same people over again as well as again, pose the most danger for capture. Inviting regulators to pass thousands of hours sitting downwards amongst the regulated firms to write detailed complex rules, which deeply touching on what those firms as well as their competitors tin give the sack create is asking for problem on a cosmic scale. I don't stimulate got to say you lot where Dodd-Frank lies on this spectrum.
Worst of all, the master copy point of Dodd-Frank "regulation" is to brand for sure that regulated fiscal companies don't lose money. If the regulators are imposing large costs on the banks as well as other institutions, but are charged amongst making for sure they don't lose money, how volition they mayhap avoid structuring regulations to assistance subsidize the manufacture as well as avoid "wasteful" competition, or upstart competitors siphoning away profitable lines of business? TBTF=TBTC.
The "stress tests" are a proficient example. Will the Fed pose out rules for the stress tests, thence that banks tin give the sack know what's coming? No. The Fed staffers know that if they write rules, as well as then the banks volition game merely about them as well as the tests volition ever pass. So, the Fed comes upwards amongst something novel as well as interesting for each stress test. The fact that fiscal institutions volition game their way merely about rules is what leads to the huge regulatory discretion nether Dodd-Frank.
This would hold upwards fine..except that billions of dollars are hanging on the outcome. Like whether B of Influenza A virus subtype H5N1 gets to pay dividends. Really, how long tin give the sack a small-scale grouping of Fed staffers remain uncaptured playing a game similar that? A regulator amongst groovy discretion is the easiest to curvature to industry's wishes.
Capture does non locomote on correct away. Zealous immature regulators wade inwards to write rules as well as cook the world. Capture happens over years of haggling, people moving inwards as well as out of manufacture as well as regulatory body, networks of friendships as well as personal relationships springing up. That hasn't happened yet. But if the scheme is ripe for capture, it would hold upwards amazing if this 1 fourth dimension inwards all of history the capture did non result.
I latterly toured the Fed's website on fiscal reform. The Fed is remarkably transparent most all the things it's doing to "implement" Dodd Frank. (Is this a plea, "this is non our idea, don't brand us create all this crazy stuff?") 2/3 of the Dodd-Frank regulations have nonetheless to hold upwards written. So select grip of Stigler's ghost, as well as let's read what the Fed is upwards to. As you lot read, think, "How much coin is at stake inwards this rule-making?" as well as "could this procedure mayhap larn captured?" Also ask, "Just how much of this is absolutely necessary to halt some other fiscal crisis?"
The Board .. is working on a in conclusion dominion that….I wonder what the CEOs retrieve of that one.
..defines when a nonbank companionship is "predominantly engaged" inwards fiscal activities; as well as the terms "significant nonbank fiscal company" as well as "significant banking concern belongings company."
..would implement the enhanced prudential standards..
..implementing Volcker Rule requirements that bound the mightiness of banking entities to engage inwards proprietary trading as well as to invest inwards or sponsor individual equity funds as well as hedge funds.
...establish margin requirements for swap dealers,… major swap participants,.. …permitting entities supervised past times the Federal Reserve to engage inwards retail unusual telephone substitution futures as well as options.
…establishes risk-management standards for designated FMUs supervised past times the Federal Reserve
…implement the credit adventure retentiveness requirements applicable inwards connectedness amongst the issuance of asset-backed securities.
…prescribe regulations or guidelines that prohibit incentive-based compensation arrangements..
The Board expects to asking comment on a proposed rule….(Stop as well as read that jaw-dropper again.)
…to apply the Depository Institution Management Interlocks Act to a nonbank fiscal companionship designated for consolidated supervision past times the Federal Reserve.
…to impose fees on banking concern belongings companies… that are sufficient to embrace the terms of supervising as well as regulating these organizations.
… prohibits a fiscal companionship from making an acquisition if the liabilities of the combined companionship would overstep 10 pct of the liabilities of all fiscal companies.(Wait. to halt some other fiscal crisis nosotros demand to regulate "appraisal administration companies?" "Minimum requirements" is clear Stigler-speak for "keep out competitors)
… found minimum requirements for registration as well as reporting of appraisal administration companies.
…implement character controls for existent estate appraisal automated valuation models.
The Board issued rules
... on stress testing requirements for for sure banking concern belongings companies…(There's a whopper of negotiating who gets to brand how much money)
…[that] establishes risk-management standards for designated FMUs supervised past times the Federal Reserve
…that permit a debit carte du jour issuer bailiwick to the interchange fee standards to have a fraud-prevention adjustment.
,… to implement changes to the marketplace adventure majuscule rule, which requires banking organizations amongst important trading activities to adjust their majuscule requirements … The in conclusion dominion includes alternative standards of creditworthiness for determining specific adventure majuscule requirements for for sure debt as well as securitization positions,
..issued reports to Congress on their implementation of OMWI [Office of Minority as well as Women Inclusion]offices.If this rule-making is all starchy for you, thank you lot to the Fed's splendid transparency, nosotros tin give the sack see what Fed staff truly create all twenty-four hours as well as who they utter to. These are the initiatory off 2 I picked off the website, honest, no cherry picking:
Influenza A virus subtype H5N1 Random Sample of a Fed Staffer’s day:
Meeting Between Federal Reserve Bank of New York (FRBNY) Staff as well as Representatives from Tullett Prebon July 23, 2012
Participants: (deleted)
Summary: Tullett Prebon as well as FRBNY staff held a telephone telephone to utter over mass adventure mitigation services inwards the involvement charge per unit of measurement derivative market. Tullett Prebon staff discussed the utilization such services play inwards the marketplace as well as the potential impact of CFTC as well as SEC proposed rules for trading as well as reporting OTC derivatives on Tullett’s tpMatch service.Well, I'm glad the Fed is listening closely to how its rules touching on the profitability of specific companies.
Meeting betwixt Federal Reserve Board Staff as well as Representatives of Citigroup Inc. June 11, 2012Again, the indicate hither is non to accuse the Fed as well as its staffers of malfeasance. All of this rule-writing is required past times the Dodd-Frank act, as well as the Fed website almost apologetically shows the department of Dodd-Frank requiring every measure. All the Fed staff I know are dedicated well-meaning people. Stuck inwards an impossible system.
Participants: (deleted)
Summary: Staff of the Federal Reserve Board met amongst representatives of Citigroup, Inc. (“Citigroup”) to utter over issues related to the proposed dominion of the Board as well as other prudential regulators on margin as well as majuscule requirements for covered swap entities as well as to utter over issues related to implementation of other requirements nether Title VII of the Dodd-Frank Act.
The Citigroup representatives discussed their views as well as concerns regarding the way inwards which the requirements nether Title VII would apply to overseas branches of United States of America banks, including non- United States of America clients of such branches, every bit good every bit related issues regarding implementation, timing as well as harmonization of global rules. Influenza A virus subtype H5N1 re-create of the coming together agenda provided past times Citigroup is attached below.
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