Karen Petrou: Important Lessons in Regulatory Impact
With battle lines deeply dug in over so many recent rules, two new studies are important, timely reminders that rewriting rules doesn’t always mean eviscerating rules. Sometimes, it’s a vital corrective to unintended consequences all too evident as proposals turn into rules that turn into a new, destructive market dynamic. It might seem to make nothing more than common sense to recognize that rules need reconsideration, but as the occasional victim of diatribes following what I thought were just pragmatic recommendations, it’s reassuring to see a study from one of the current rules’ architects, Daniel Tarullo, and another from the Fed lay out the need for meaningful revisions to two high-impact rules: big-bank stress tests and – just in time for still more of them – liquidity rules.
First to Mr. Tarullo’s paper. In addition to being the instigator of much in the Dodd-Frank Act and the rules thereafter, Mr. Tarullo inaugurated big-bank stress tests in 2009. Banks then denounced them, but they weren’t exactly in the best of bargaining positions after the 2008 great financial crisis. So, stress tests began as an urgent reality check. But, proving the regulatory-rewrite point, over a decade later they took on a new purpose in concert with still more importance by virtue of the new stress capital buffer inexorably and often ineffectively linking stress testing to the bank regulatory requirements that barely existed in 2009.
In 2009, we needed stress tests because capital rules were essentially toothless. Capital rules are now fanged …