Thursday, February 24, 2011

Banking Reform: More Equity, Less Government

From my article at the (with Robert Dell),"More Equity, Less Government: Rethinking Bank Regulation":

History’s two most influential advocates for economic liberty, Adam Smith and Milton Friedman, nevertheless turned away from “free banking” to support some financial regulation and legislative reform in the wake of financial crises. Yet their proposed reforms would have limited government discretionary power and systemic micromanagement. What would they have concluded from the recent crisis and the policy responses embodied in the Dodd-Frank Act, which expands these powers without addressing the policy failures that largely produced the crisis?

Supporters of the Dodd-Frank Wall Street Reform and Consumer Protection Act obviously believe expanded regulatory powers offer the best solution to reform, but they should consider that almost all previous major banking legislation has helped to create conditions that inevitably lead to the next banking crisis. A more market-based solution would be to simply regulate higher mandated equity standards in the range of 15 to 30 percent of total assets. In the tradition of Smith and Friedman, this approach would be a much more effective regulatory approach to curbing risk-taking, reducing systemic risk, and preventing a future banking crisis than 2,000 pages of Dodd-Frank.


At 2/24/2011 2:56 PM, Blogger morganovich said...

Under the Durbin Amendment to Dodd-Frank Financial Reform Act, the US Treasury was charged with fixing the prices that banks could charge merchants for debit card transactions. On December 16, 2010, the Treasury lowered the boom on the banks, setting interchange fees for transaction processing at 12 cents per transaction as opposed to a prior average of over 44 cents, and prospectively eliminating roughly $12 billion in annual revenue for the banks. These are the same banks where the Fed is busy guaranteeing trillions of dollars in mortgage loans so the banks won’t be considered insolvent.

At 2/24/2011 3:01 PM, Blogger Benjamin said...

30 percent equity sounds rather onerous.

15 percent, maybe we can live with.

Also, what is a bank? Investment banks? Merchant banks? Commercial banks with FDIC insurance? Can they merge, be under the same umbrella, use the same name?

I guess I go for 15 percent equity, to qualify for FDIC insurance. Other banks have no regs but must tell all in bold clear print, "You have no federal insurance, and we are a bunch of Wall Streeters who will gamble with your money, loser."

Problem is, when a huge national investment bank fails, or an AIG, will we be able to just stand by?

At 2/24/2011 3:25 PM, Blogger juandos said...

Obama banking reform: buy votes with someone else's money...

At 2/24/2011 3:27 PM, Blogger Buddy R Pacifico said...

Would you like to buy a failed or failing financial institution in the Republic of Texas? OK, then you have to submit a recapitalization plan for at least 5% Tangible Equity Capital. 5% and voila, First Pacifico Republic Bank. Substantial penalty for early withdrawls.

At 2/24/2011 3:58 PM, Blogger Hydra said...

What? Market based regulaton?


At 2/24/2011 4:15 PM, Blogger Ron H. said...


"Obama banking reform: buy votes with someone else's money..."

Thanks for the link. Now I'll be grumpy for the rest of the day.

At 2/24/2011 9:38 PM, Anonymous Anonymous said...

Can a bank that takes consumer deposits reject FDIC insurance? There's no point in accepting the lower returns of having a high equity position if you're still stuck paying the costs of the FDIC. I've considered the idea of starting a bank whose sales pitch is "safety", but since regulatory costs are fixed regardless of capital structure it's a tough case to make to investors. Basically, government regulations require unsafe capital structures in order to give reasonable returns to capital.

At 2/25/2011 2:51 AM, Anonymous Anonymous said...

Dodd-Frank Reform is a good opportunity.
E.g. Japan -- with 190% of GDP debt -- has an investment level of three traditional rating agencies. Is it true? Do you recognize risks?
Just remember triple A house debt instruments...

At 2/25/2011 10:37 AM, Blogger Henry said...

Free market, but only 85% free market? Let the lenders set the rates; their money is at risk.

The whole problem came out of speculation in mortgage securities, not houses, because of the Federal Reserve's rotten monetary policy.

A 100% loan-to-value made sense in the recent market; 80/20 maybe twenty years ago. So, we want to pull the patient out of intensive care and run him around the block to get him in the shape he should have been in before the heart attack? It will kill him, like every other government attempt to bolt the barn door after the horse is gone.

At 2/25/2011 11:52 AM, Blogger Tom said...

Massive government market interference was the cause of the subprime crisis. Dodd-Frank will create more problems, and enshrine too big to fail. The big banks should all be broken up. Government must withdraw its fake guarantees and fake regulations, and make financial institutions and their investors take the hit, not the taxpayers.

We should adopt the Canadian banking system, explained in another of Dr. Perry's articles. More government is the problem, not the solution.

At 2/25/2011 12:11 PM, Blogger Henry said...

Sell the mortgages at the market. Remeber Merrill Lynch sold $billions at 22 cents on the dollar. A homeowner could handle a $22,000 loan far more easily than a $1000,000 and stay in the neighborhood.

The Feds have already paid for the mistakes once or twice (TARP and FNM). Let the homeowner take advantage of situation, rather than give banks and broker all the trading upside with taxpayer money.


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