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10 10, 2023

M101023

2023-10-10T11:29:24-04:00October 10th, 2023|6- Client Memo|

The Urgent Financial Reform the Fed and FDIC Hope we Forget

Even after the great financial crisis in 2008, the repo meltdown of 2019, a financial-market bailout of unprecedented proportions in 2020, and three bank failures so far this year, the FDIC and Fed are no closer than they were in 2007 to knowing what to do if a medium-size bank fails, a nonbank barrels down on the banking system, or critical financial-infrastructure flickers.  Bond markets are back on the brink and geopolitical risk have become a still-greater concern.  The agencies may think new capital and resolution rules are an iron dome allowing them to forego agency repair, but history – see the Gaza Strip – provides no comfort – as I hope we don’t have to learn again, fortifications aren’t enough in the absence of effective surveillance and rapid response.

m101023.pdf

10 10, 2023

Karen Petrou: The Urgent Financial Reform the Fed and FDIC Hope we Forget

2023-10-10T11:29:16-04:00October 10th, 2023|The Vault|

Even after the great financial crisis in 2008, the repo meltdown of 2019, a financial-market bailout of unprecedented proportions in 2020, and three bank failures so far this year, the FDIC and Fed are no closer than they were in 2007 to knowing what to do if a medium-size bank fails, a nonbank barrels down on the banking system, or critical financial-infrastructure flickers.  Bond markets are back on the brink and geopolitical risk have become a still-greater concern.  The agencies may think new capital and resolution rules are an iron dome allowing them to forego agency repair, but history – see the Gaza Strip – provides no comfort – as I hope we don’t have to learn again, fortifications aren’t enough in the absence of effective surveillance and rapid response.

The hard truth is the banking agencies after 2008 did what politicians and lawyers know best: they identified gaps in the law that the agencies self-defensively said barred them from preventing a crisis, asking for and then getting a new rulebook without also meaningfully addressing and then correcting their own structural weaknesses. And so it goes again.  Thinking dominated by lawyers and politicians – for every successful public leader is a politician no matter his or her nominal independence – is writing lots and lots more rules.  Some fix gaps found in the old law and rule, many pave over problems that could have been fixed under old law and rule, and some are as counter-productive as we’ve noted in …

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