We will shortly release to the public a new FedFin white paper that catalogs an array of emerging systemic risks that we find can often be attributed to the post-crisis regulatory rewrite. Let me make it as clear as I can: this paper is not about withdrawing the rules – some of them should be a lot tougher. Instead, it’s a plea to policy-makers to make up their mind about their top-priority goals so that the rulebook implements them instead of growing ever larger and more contradictory. Right now, each policy action causes a market reaction for which the new framework is still all too often unprepared eight years after the crisis. As we show, more than a few of these market reactions are very, very troubling.
As we worked on this paper, I made my own list of all of the goals policy-makers are pursuing. A shortened list follows:
- Make big banks smaller and safer.
- Keep big banks critical engines of financial intermediation and stewards of financial-market infrastructure.
- Reduce community-bank burden.
- Make regional banks as safe and sound as the very biggest banks.
- Regulate the “shadows”.
- Promote financial-market innovation.
- Ensure non-banks supply liquidity, support capital formation, increase credit availability.
- Regulate non-bank providers of liability products, especially cash equivalents.
- Limit bank reliance on short-term wholesale funding.
- Increase the protections afforded to insured deposits.
- Prevent cross-border systemic risk.
- Protect host-country financial operations.
- Limit central-bank liquidity exposure.
- Ensure central banks can support financial stability, including threats to it from nonbanks.
- Ensure operational resilience.
- Mandate an array of costly new governance standards.
- End taxpayer bail-outs.
- Ensure taxpayers are on stand-by just in case.
- Require lots of capital to ensure solvency.
- Require lots of liquidity to ensure liquidity.
- Require lots of stress testing to ensure both solvency and liquidity, at least at big banks.
- Impose additional debt/equity buffers just in case.
- De-risk for some clients.
- Re-risk for others.
And, so it goes. All of these objectives are in one sense great. Each on its own would be hugely better than the pre-crisis framework. But, there’s simply no way all of these goals can be executed at the same time. Trying to do so distorts markets and, as a result, makes them a lot riskier for all the good intentions behind each of the new rules.