The Wall Street Journal: How to fix the financial system

“The Committee on Capital Markets Regulation, a diverse group of academics, former government officials, and business leaders, plans to present a comprehensive list of recommendations Tuesday calling for an overhaul of the rules supervising financial markets. The recommendations will likely attract attention from key government officials because of the people’s credentials who put together the report, called “The Global Financial Crisis: A Plan For Regulatory Reform.”

“Among others, the report was penned by R. Glenn Hubbard, dean of the Columbia Business School, John L. Thornton, Chairman of the Brookings Institution, Hal S. Scott, Nomura Professor and Director of the Program on International Financial Systems at Harvard Law School, and Roel Campos, a former commissioner at the Securities and Exchange Commission. The report is thorough – the executive summary alone has 57 recommendations.

“Some of the key recommendations:

“1) Keep two or three regulators for the financial system – the Fed, a new US Financial Services Authority, and an investor and consumer protection agency. The USFSA ‘would regulate all aspects of the financial system, including market structure and activities and safety and soundness for all financial institutions.’

“2) Mandate centralized clearing of credit default swaps. To the extent that some CDSs stay outside a centralized clearing process, the committee calls for higher capital requirements to ‘compensate for increased systemic risk of these contracts’.

“3) Don’t make a hasty decision to raise capital requirements across the financial sector until more analysis is done. But the committee does recommend higher capital requirements for megabanks, such as those with more than $250 billion in assets. ‘Given the concentration of risks to the government and taxpayer, we recommend that large institutions be held to a higher solvency standard than other institutions, which means they should hold more capital per unit of risk.’

“4) Strengthen the ‘leverage’ capital ratio, and debate whether the leverage ratio should be based on common equity rather than total Tier 1 capital.

“5) Give the Fed temporary authority to evaluate confidential information supplied by hedge funds.

“6) Relax acquisition rules to make it easier for private equity firms to pump money into the banking sector.

“7) Create a comprehensive policy called the Financial Company Resolution Act, that would be allowed to put any financial company into receivership, not just ‘systemically’ important ones.

“8) Ban or limit high-risk mortgages from being securitized.”

Source: Damian Paletta, The Wall Street Journal

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