The Financial Times headline, “Republicans join liberal view of megabanks,” could probably use a qualifier. This is still a minority position within the GOP, though far less so among conservatives. Still, it is an idea with surprising momentum given that bank collapses no longer fill the news. The FT:
What was once dismissed as a fringe idea during the debate over the 2010 Dodd-Frank law that reformed US financial regulation is becoming part of the conversation in Washington, as lawmakers consider additional measures that threaten the largest US banks. These include forced divestments and higher capital requirements.
“The Republican response to Dodd-Frank’s overkill is to break up the banks. The far left also wants to break up the big banks,” said Jaret Seiberg, senior policy analyst at Guggenheim Securities. “There are . . . serious threats here.”
Continued concern about Too Big To Fail and another financial crisis is one factor driving the idea on the right. But so too is concern about the future of center-right politics and policy in America after a consecutive calamitous presidential elections. Some conservatives want to make more clear the distinction between being pro-market and being pro-business. They see a large and concentrated financial sector as being the result of corporatist policies rather than as a market outcome. It is also a way of signaling middle-income voters that center-right policymakers are concerned about more than just the capital gains rates paid by the wealthy, particularly those on Wall Street. They want to see the GOP as pro-family, pro-growth, and pro-market.
But there are other financial reform ideas that should be looked at. Columbia University’s Charles Calomiris, also an AEI adjunct scholar, offers some recommendations for regulatory reform with an emphasis on market rules clear, simple, hard, and meaningful. These include:
- The reform of the regulatory use of ratings that would quantify the meaning of debt ratings and hold Nationally Recognized Statistical Rating Organizations (NRSROs) financially accountable for egregious inaccuracy in forecasting the probability of default of rated debts;
- The use of loan interest rate spreads as forecasts of non-performing loans for purposes of budgeting capital to absorb loan default risk;
- The establishment of a transparent and simple contingent capital (CoCo) requirement that incentivises large banks to replace lost capital in a timely way (rather than disguise losses and avoid replacing lost capital);
- The setting of simple cash requirements for banks (this would not resemble the complicated and poorly conceived new ‘liquidity’ requirements created by the Basel III process);
- The creation of a simple macro prudential rule to govern the variation in capital requirements over time and, which would trigger changes only under extreme circumstances, based on objective, observable criteria;
- A reform of resolution procedures for large financial institutions that would require a pre-specified minimum haircut on unsecured creditors whenever the resolution authority employs taxpayer funds in the resolution (i.e. whenever there is a departure from the enforcement of strict priority in the resolution process);
- The establishment, as part of the ‘living wills’ of global financial institutions that govern their prospective resolution, of clearly demarcated lines of legal and regulatory jurisdiction (‘ring fencing’) over the disposition of all the assets and liabilities within a bank.