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A NEW REGIME FOR FINANCIAL INSTITUTIONS

A NEW REGIME FOR FINANCIAL INSTITUTIONS

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Published by EKAI Center
Congressional Testimony

A New Regime for Regulating Large, Complex Financial Institutions
Simon Johnson Peterson Institute for International Economics and MIT

Testimony submitted to the Subcommittee on Financial Institutions and Consumer Protection, Senate Committee on Banking, Housing, and Urban Affairs hearing on “A New Regime for Regulating Large, Complex Financial Institutions.” December 7, 2011

Note: This testimony draws on joint work with James Kwak, particularly 13 Bankers: The Wall St
Congressional Testimony

A New Regime for Regulating Large, Complex Financial Institutions
Simon Johnson Peterson Institute for International Economics and MIT

Testimony submitted to the Subcommittee on Financial Institutions and Consumer Protection, Senate Committee on Banking, Housing, and Urban Affairs hearing on “A New Regime for Regulating Large, Complex Financial Institutions.” December 7, 2011

Note: This testimony draws on joint work with James Kwak, particularly 13 Bankers: The Wall St

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Published by: EKAI Center on Jan 02, 2012
Copyright:Public Domain

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08/18/2014

 
 
Oi`ermsshi`fc Tmsthai`y
F @mw ^meham gir ^meucfth`e Cfrem, Oiapcmx Gh`f`ohfc H`sthtuthi`s
_hai` Kil`si` Zmtmrsi` H`sthtutm gir H`tmr`fthi`fc Moi`iahos f`d AHT Tmsthai`y sunahttmd ti tlm _unoiaahttmm i` Gh`f`ohfc H`sthtuthi`s f`d Oi`suamr Zritmothi`, _m`ftm Oiaahttmm i` Nf`bh`e, Li
ush`e, f`d ]rnf` Fggfhrs lmfrh`e i` –F @mw ^meham gir ^meucfth`e Cfrem, Oiapcmx Gh`f`ohfc H`sthtuthi`s.‑
 Dmomanmr 5, >:66 @itm; Tlhs tmsthai`y drfws i` kih`t wirb whtl Kfams Bwfb, pfrthoucfrcy 6? Nf`bmrs; Tlm Ufcc _trmmt Tfbmivmr f`d Tlm @mxt Gh`f`ohfc Amctdiw`, f`d Zmtmr Nii`m, h`ocudh`e Muripm i` tlm Nrh`b. Afh` Zih`ts 6)
 
^mom`t fdkustam`ts ti iur rmeucftiry grfamwirb, h`ocudh`e tlm –Didd
-Grf`b
Ufcc _trmmt ^mgira f`d Oi`suamr Zritmothi` Fot,‑ lfvm `it ghxmd tlm oirm
princmas tlft nriuelt us ti tlm nrh`b ig oiapcmtm oftfstriplm h` gfcc >::<; f. Ziwmrguc pmipcm ft tlm lmfrt ig iur gh`f`ohfc systma sthcc lfvm tlm h`om`thvm f`d fnhchty ti tfbm i` cfrem faiu`ts ig rmobcmss rhsb
tlriuel nirriwh`e cfrem faiu`ts rmcfthvm ti tlmhr mquhty. Ulm` tlh`es ei wmcc, f gmw OMIs f`d f safcc `uanmr ig itlmrs emt luem nm`mghts
msthaftmd ft ivmr $> nhcchi` gria >::: ti >::< ft tlm tip 64 ]_ gh`f`ohfc h`sthtuthi`s. n. Ulm` tlh`es ei nfdcy, siohmty, irdh`fry ohthzm`s, f`d tfxpfymrs emt tlm diw`shdm, h`ocudh`e airm tlf` < ahcchi` kins cist f`d f amdhua-tmra h`ormfsm h` dmnt-ti-EDZ ig ft cmfst $5 trhcchi` (riuelcy =: pmrom`t ig EDZ).
 
 
>) Tlhs hs f ocfssho rmohpm gir gh`f`ohfc h`stfnhchty f`d ghsofc ofcfahty. ?) Iur shx cfremst nf`b licdh`e oiapf`hms ourrm`tcy lfvm fssmts vfcumd ft ocism ti $8.= trhcchi`, wlhol hs friu`d 7>.= pmrom`t ig EDZ (ush`e tlm cftmst fvfhcfncm dftf, gria m`d ig V?, >:66). Tlm sfam oiapf`hms lfd nfcf`om slmmts wirtl friu`d == pmrom`t ig EDZ nmgirm tlm orhshs (m.e., h` >::7) f`d `i airm tlf` 65 pmrom`t ig EDZ h` 688=. 4) Uhtl fssmts rf`eh`e gria friu`d $<:: nhcchi` ti `mfrcy $>.= trhcchi` (u`dmr ]_ Em`mrfccy Foomptmd Fooiu`th`e Zrh`ohpcms, ir EFFZ), tlmsm nf`b licdh`e oiapf`hms frm pmromhvmd
ny tlm afrbmt fs –tii nhe ti gfhc,‑ amf`h`e tlft tlmy frm hapchohtcy
nfobmd ny tlm gucc gfhtl f`d ormdht ig tlm ]_ eivmr`am`t. Tlmy of` nirriw airm olmfpcy tlf` tlmhr oiapmthtirs
msthaftms pcfom tlhs fdvf`tfem nmtwmm` >= f`d 5= nfshs pih`ts
f`d lm`om nmoiam cfremr. =) H` puncho stftmam`ts, tip mxmouthvms h` tlmsm vmry cfrem nf`bs dhsouss tlmhr pcf`s gir gurtlmr ecinfc mxpf`shi`
prmsuafncy h`ormfsh`e tlmhr fssmts gurtlmr wlhcm oi`th`uh`e ti nm lhelcy cmvmrfemd. H` hts puncho stftmam`ts, tlm ]_ Trmfsury fppmfrs ti m`dirsm tlhs strftmey. 7) H` tlhs oi`tmxt, tlm Triuncmd Fssmt ^mchmg Zrierfa (TF^Z) pcfymd f she`hghof`t ricm prmvm`th`e tlm dmmp rmomsshi` ig >::<
 ‟
:8 gria nmoiah`e f gucc-nciw` Ermft Dmprmsshi`, prhafrhcy ny privhdh`e ofphtfc ti gh`f`ohfc h`sthtuthi`s tlft wmrm ocism ti h`sicvm`oy ir itlmrwhsm u`dmr afrbmt prmssurm. Nut tlmsm fothi`s gurtlmr dhstirtmd h`om`thvms ft tlm lmfrt ig Ufcc _trmmt. @mhc Nfrigsby, tlm _pmohfc H`spmotir Em`mrfc gir tlm Triuncmd Fssmts ^mchmg Zrierfa put ht wmcc h` lhs Kf`ufry >:66 qufrtmrcy rmpirt,
maplfshzh`e; –pmrlfps TF^Z‘s aist she`hghof`t cmefoy *hs+ tlm airfc lfzfrd f`d
pitm`thfccy dhsfstrius oi`smqum`oms fssiohftmd whtl tlm oi`th`umd mxhstm`om ig
gh`f`ohfc h`sthtuthi`s tlft frm “tii nhe ti gfhc.‘‑
 5) Ti smm kust tlm ghsofc hapfot ig tlm gh`f`om-h`duomd rmomsshi`, oi`shdmr olf`ems h`
tlm Oi`ermsshi`fc Nudemt Igghom‘s (ONI) nfsmch`m prikmothi`s ivmr tham. H` Kf`ufry
>::<, tlm ONI prikmotmd tlft titfc eivmr`am`t dmnt h` prhvftm lf`ds
tlm nmst amfsurm ig wlft tlm eivmr`am`t iwms
wiucd gfcc ti $=.6 trhcchi` ny >:6< (>? pmrom`t ig EDZ). Fs ig Kf`ufry >:6:, tlm ONI prikmotmd tlft ivmr tlm `mxt mhelt ymfrs, dmnt wiucd rhsm ti $6?.5 trhcchi` (ivmr 7= pmrom`t ig EDZ)
f dhggmrm`om ig $<.7 trhcchi`. <) Aist ig tlhs ghsofc dfafem hs `it dum ti tlm Triuncmd Fssmts ^mchmg Zrierfa
f`d dmgh`htmcy `it dum ti tlm pfrt ig tlft prierfa wlhol h`kmotmd ofphtfc h`ti gfhch`e nf`bs. Ig tlm olf`em h` ONI nfsmch`m, =5 pmrom`t hs dum ti dmormfsmd tfx rmvm`ums rmsucth`e gria tlm gh`f`ohfc orhshs f`d rmomsshi`2 65 pmrom`t hs dum ti h`ormfsms h` dhsormthi`fry spm`dh`e, siam ig ht tlm sthaucus pfobfem `momsshtftmd ny tlm gh`f`ohfc orhshs (f`d
 
 
nmofusm tlm –futiaftho stfnhchzmrs‑ h` tlm ]`htmd _tftms frm rmcfthvmcy wmfb)2 f`d
f`itlmr 64 pmrom`t hs dum ti h`ormfsmd h`tmrmst pfyam`ts i` tlm dmnt
nmofusm wm `iw lfvm airm dmnt.
6
 8) H` mggmot, f gh`f`ohfc systma whtl df`emriuscy ciw ofphtfc cmvmcs
lm`om pri`m ti afkir oiccfpsms
ormftms f `i`trf`spfrm`t oi`th`em`t chfnhchty gir tlm gmdmrfc nudemt h` tlm ]`htmd _tftms. Ht fcsi dfafems tlm `i`gh`f`ohfc smotir nitl dhrmotcy
wlm` tlmrm hs f ormdht oru`ol, gicciwmd ny f dmmp rmomsshi`
f`d h`dhrmotcy tlriuel ormfth`e f guturm tfx chfnhchty. 6:) H` prh`ohpcm, _mothi` 67= ig Didd-Grf`b strm`etlm`s prudm`thfc stf`dfrds gir cfrem, h`tmroi``motmd gh`f`ohfc h`sthtuthi`s
—h`ocudh`e –`i`nf`bs.‑ H` prfothom, fcc tlm
fvfhcfncm mvhdm`om sueemsts tlft nhe nf`bs f`d itlmr gh`f`ohfc h`sthtuthi`s frm sthcc smm` fs tii nhe ti gfhc. Tlhs hs `it f afrbmt2 ht hs f cfrem-sofcm, `i`trf`spfrm`t, f`d u`gfhr eivmr`am`t sunshdy solmam. Ht hs fcsi vmry df`emrius. 6 66) Tlmrm hs `itlh`e h` tlm Nfsmc HHH fooird i` ofphtfc rmquhrmam`ts tlft sliucd nm oi`shdmrmd m`oiurfeh`e. H`dmpm`dm`t f`fcysts lfvm mstfnchslmd nmyi`d f rmfsi`fncm diunt tlft sunstf`thfccy rfhsh`e ofphtfc rmquhrmam`ts wiucd `it nm oistcy gria f siohfc pih`t ig vhmw (smm tlm wirb ig F`ft Fdafth ig _tf`gird ]`hvmrshty f`d lmr oiccmfeums). 6>) Nut tlm gh`f`ohfc s
motir‘s vhmw lfs prmvfhcmd—
tlmy freum tlft rfhsh`e ofphtfc rmquhrmam`ts whcc sciw moi`iaho eriwtl. Tlhs freuam`t hs suppirtmd ny siam ahscmfdh`e si-ofccmd rmsmfrol privhdmd ny tlm H`sthtutm gir H`tmr`fthi`fc Gh`f`om (f cinny eriup). Tlm punchocy fvfhcfncm f`fcythofc wirb ig tlm igghohfc smotir i` tlhs hssum (gria tlm Nf`b gir H`tmr`fthi`fc _mttcmam`ts f`d tlm @mw Xirb Gmd) hs `it oi`vh`oh`e
hg tlhs hs tlm nfshs gir pichoyafbh`e dmohshi`s, tlmrm hs smrhius triuncm flmfd. 6?) Mvm` airm dhsfppih`th`e hs tlm gfhcurm ig tlm igghohfc smotir ti m`efem whtl hts
6
 
_mm fcsi tlm Afy >:6: mdhthi` ig tlm H`tmr`fthi`fc Ai`mtfry Gu`d‘s (HAG) oriss
-oiu`try ghsofc ai`htir gir oiapfrfncm dftf gria itlmr h`dustrhfchzmd oiu`trhms, fvfhcfncm ft lttp;//www.hag.ire/ . Tlm nix i` dmnt dy`fahos sliws tlft aistcy tlmsm frm dum ti tlm rmomsshi`2 ghsofc sthaucus i`cy fooiu`ts gir i`m-tm`tl ig tlm h`ormfsm h` dmnt h` fdvf`omd E->: oiu`trhms. Tfncm 4 h` tlft rmpirt oiapfrms suppirt ny tlm eivmr`am`t gir tlm gh`f`ohfc smotir foriss cmfdh`e oiu`trhms2 tlm ]`htmd _tftms privhdmd airm ofphtfc h`kmothi` (fs f pmrom`t ig EDZ) nut ciwmr eufrf`tmms rmcfthvm ti Muripm.
 

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