OPINION

THE SHAPE AND FORM OF FINANCIAL REFORM?
by Guillermo Kopp
March 15, 2010 How would Congress celebrate two years since the collapse and rushed sale of Bear Stearns? Is it now the time for Senator Dodd to sponsor a bill that promotes financial stability in the United States? Could a bare bill outpace another bear? Will the bill’s 1,336 pages create unruly rules? Among many prescriptive rules and provisions, the finance bill would empower a Systemic Risk Council, establish an Office of Financial Research, and create a Consumer Protection watchdog. Such new offices would work under the auspices of the Department of the Treasury and the Federal Reserve (a.k.a. “The Fed”). And the President of the United States may handpick the head of an autonomous Fed. Will such new watchdogs bark at the old unruly players? If the President of the United States may appoint the top financial regulators, who will bark at the politically silenced watchdogs? What will prevent regulators from making whole investors who place large (and losing) financial bets, thus digging big holes in the economy? Borrowing from advanced risk management methods, complex reports on systemic credit exposure and set concentration limits might tackle the entire financial system. But such overarching controls would do little to reactivate productive credit and restore confidence in the financial markets. Indeed, the word “credit” comes from ancient Latin. It means: “he believes.” So banks should believe in what, the new regulatory agencies and rules? Would the public trust the banks if such rules drive an increase in fees? Principles should come before the rules. Putting the bears behind, bankers and regulators should better bear in mind that their end customers deserve credit. Consumers and businesses, large and small, will need access to various forms of funding, payments and investments to sustain economic growth. The bill would introduce a protracted consultation mechanism and cascading of rules between the newly added and a plethora of existing regulators. Such back-and-forth commentary may be too slow to respond to the split-second swings in the interconnected financial markets. Absent a thoughtful rationalization and reform of existing financial regulations, the bill might enshrine regulatory overhead. Financial stability is a must, and unwieldy institutions should be reined in. Nonetheless, financial laws must go farther than feeding the Fed. Opening the doors to the financial system of the future will require much more than just another control knob. What about the banks? Some rules might constrain productive capital but spare speculation. To promote a new order, Boards of Directors at leading banks should take charge in revitalizing the strategic business agenda, appointing a principled management team, and acting upon their fiduciary responsibility to the respective bank stakeholders. In principle, that will be a matter of principles…

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