DELIBERATIVE//NOT FOR DISTRIBUTION
very same debt is now at the heart of the current crisis.)
We should have a similar cap on leverage—total borrowing—by any individual bank, relative toGDP. In some European countries, one bank can bring down the nation. Why would we wantsuch unfair and inefficient arrangements in America?
Explore reforms now being considered by the U.K. to make the unwinding of its biggest banksless risky for the broader economy.
Impose a fee on banks whose size exceeds a certain percentage of GDP to cover the cost theywould impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status. The fee would incentivize the major banks to slim themselves down; failure to do sowould result in increasing the fee until the banks are systemically safe. Any fees collected would be used to reduce taxes for the broader non-financial corporate sector.
In addition, focus on establishing an FDIC insurance premium that better reflects the riskiness of banks’ portfolios. This would provide an incentive for banks to scale down, allowing the financialsystem to absorb them organically in the event of a collapse.
Strengthen capital requirements, moving far beyond what is envisioned in the current BaselAccord. The Accord is a mixture of regulatory oversight and political compromise. As a result,the U.S. has allowed its banking policy to be determined by the “least common denominator”among European and Asian countries, many with a long history of not being prudent. We want afinancial system that has more equity financing and relatively little debt financing. Eliminating subsidies would encourage the affected institutions to downsize by selling off certainoperations or face having to pay the real costs of bailouts. Removing the taxpayer subsidies that createtoo big to fail will also strengthen local and community banks who are unable to compete with thesubsidized megabanks.We need banks that are small and simple enough to fail, not financial public utilities. Hedge funds and private equity funds go out of business all the time when they make big mistakes, to the notice of few, because they are not too big to fail. There is no reason why banks cannot live with the same reality.This country was not built on the basis of big banks. The dynamism of our core non-financial sector does not depend on having financial institutions that can take—and consistently get wrong—economy— sized risks.
MAXIMIZING DERIVATIVES TRANSPARENCY
As President, Governor Huntsman’s administration will be committed to enhancing transparency in thederivatives markets. An opaque derivatives market was one reason for the systemic impact of thesubprime mortgage crisis. Greater transparency will permit greater oversight by both market participantsand regulators—and will also allow end-users to negotiate better terms with Wall Street and, in turn,lower trading costs. We need to encourage the creation of multiple clearinghouses in order to minimizethe systemic impact of a problem in any one of them.