Safety nets must be implemented judiciously to ensure stability of the global financial system
Thomas Hoenig, vice chairman of FDIC advocates for more useful and transparent capital standards that allow for greater comparability among all global and domestic financial firms. April 22, 2013 | Thomas HoenigFor nearly half a decade, policymakers globally have been producing a near constant stream of initiatives to try to address the effects of the financial crisis. Government safety nets comprising deposit insurance, central bank loans, and sovereign support—and the multi-billion dollar subsidy they create—have expanded to cover and fund activities and enterprises that traditionally do not need protection to function. For all this effort, our financial and economic systems remain fragile. Also of concern is that the ever-expanding safety net and related subsidy encourage global firms to take on unwise leverage and risks, subjecting depositors and the public to sizable potential losses. Without fundamental changes to the framework of the financial system and the incentives that drive its behaviour, we can be confident that these largest institutions will again threaten the economy and that the public will be left holding the bag again. While there are no perfect solutions, there are actions that, taken together, can more effectively improve outcomes. We must change the structure of the industry to ensure that the coverage of the safety net is narrowed to where it is needed, and stop the extension of its subsidy to an ever-greater number of firms and activities. We must simplify and strengthen capital standards to contain the impulse for excessive leverage and to provide a more useful backstop to absorb unexpected losses. Finally, in the United States, I am recommending that we must reestablish a more rigorous examination program for the largest banks and bank holding companies to best understand the risk profile of both individual firms and financial markets. First, subsidising two important sectors of the financial services industry—universal commercial banks and shadow banks—with access to the safety net puts the financial system and the public at risk, even with the added protection in the US of Titles I and II of the Dodd-Frank... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Basel III, Capital & Strategic Issues, Regulation, Risk and Regulationbasel III,Capital & Strategic Issues,riskregulation,Risk and Regulation, Basel III,Capital & Strategic Issues,Regulation,Risk and Regulation, Keywords:Thomas Hoenig, FDIC, Dodd-Frank Act, Systemic Risk Thomas Hoenig, FDIC, Dodd-Frank Act, Systemic Risk
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