Neal Wolin And The Bankers

Deputy Treasury Secretary Neal Wolin addressed the Financial Services Roundtable today.  His prepared remarks included the following key paragraphs,

“The days when being large and substantially interconnected could be cost-free – let alone carry implicit subsidies – should be over.  The largest, most interconnected firms should face significantly higher capital and liquidity requirements. 

“Those prudential requirements should be set with a view to offsetting any perception that size alone carries implicit benefits or subsidies.  And they should be set at levels that compel firms to internalize the cost of the risks they impose on the financial system.   

“Through tougher prudential regulation, we aim to give these firms a positive incentive to shrink, to reduce their leverage, their complexity, and their interconnectedness.  And we aim to ensure that they have a far greater capacity to absorb losses when they make mistakes.    

“……  Leading up to the recent crisis, the shock absorbers that are critical to preserving the stability of the financial system – capital, margin, and liquidity cushions in particular – were inadequate to withstand the force of the global recession. 

“While the largest firms should face higher prudential requirements than other firms, standards need to be increased system-wide.  We’ve proposed to raise capital and liquidity requirements for all banking firms and to raise capital charges on exposures between financial firms.” 

There is nothing wrong with this statement of principles, although I would prefer a much blunter statement of “Too Big To Fail is Too Big To Exist”. 

But where are the numbers?  How much is the administration proposing to raise capital requirements, and how will these steepen as banks and other financial firms move into the “red zone” above $100bn total assets?  Without specific figures on the table, it is simply impossible to evaluate whether this is a good proposal or window dressing.

Don’t tell me leading administration figures don’t have a view on the numbers – with the lobbyists and behind the scenes with journalists they are happy to provide more specific briefings, and you know that Treasury/Federal Reserve Board guidance or “input” into the regulatory process will have huge weight.  And all the background information – including Treasury’s recent actions vis-à-vis big banks, this week and last – point in the same direction: window dressing.

Mr. Wolin, for your proposals to have credibility and to win support, you must answer the question: in the view of the administration, how much capital is “enough”?

By Simon Johnson

12 thoughts on “Neal Wolin And The Bankers

  1. Interesting that these are actual public comments from an Administration official.

    Has anyone above the level of Deputy Treasury Secretary said anything along the same lines?

  2. “Mr. Wolin, for your proposals to have credibility and to win support, you must answer the question: in the view of the administration, how much capital is “enough”?”

    He is rich who knows how much is enough.

    — Tao Teh Ching


  3. Whoever prepared those remarks writes really well – but it could easily be Wolin, he’s no doubt, very bright. That said, I wholeheartedly agree with this post. Look how the Bush administration so quickly & effectively dismantled effective financial regulation. Why can’t Obama do the reverse?

  4. I seem to remember some economist at MIT stating he thought there should be at least 3 times the capital requirements as now. He also said there should be a 5 year gap between top jobs in Washington and top jobs in Wall Street. It sticks in my memory strongly because most university professors will give vague recommendations, but rarely specific numbers. It seems that MIT economist has more courage to talk about specific capital requirement goals than Secretary Geithner has.

    But you know for the life of me I can’t remember that economist’s name….. Simon something….. hahaha

  5. Question, what would we expect as a result of higher capital standards? Immediate spin off of Investment Banks from Commercial Banks?

    Second question. Is there anyone that monitors derivative contract walk away defaults or litigation against banks by purchaser of derivative?

  6. Geithner’s “white paper” a little while back said tier 1 financial institutions should face higher capital requirements, but was similarly vague on the numbers.

  7. Who got all these banks to buy these toxic assets from the U.S. Govt such as Fannie/Ginnie, GSEs and REMICs?

  8. I like the line of questioning that you cast… It seems to indicate the need for a macro-measure of how to gauge when the financial sector as a whole is too big – that is, in relation to the ‘real economy’.

    Without that macro measure are judgments on specific firms venturing into the realm of moral hazard? – even though intuitively we know you are right!

    oh yeah – another sort of macro-measure that I think might be useful is in assessing when a firm is not only TBTF but is so big that it has capacity to place democratic principles at risk… that is a very closely related but slightly different approach to the matter at hand.

  9. Simon, I wrote the following in response to James’ “More on Managing Systemic Risk”:

    “Yes, James, it’s time to control the oligarchs, still and always!!! I like the idea of having the “too big to fail” financial institution provide for their own guarantee fund. Makes incredibly good sense, and would be easier to legislate than having them increase their capital requirements in the present Congressional atmosphere. It probably could be required by the Fed even without Congressional action, or the FDIC could simply make a change in its required contributions engineered to be a larger percentage of deposits for banks with more depository business (this would take care of all of the banks, but not all of the non-banking holding companies, and so might not work as well).

    Once again, rational doesn’t really seem to be realistic for the oligarchs and their power elite friends. Probably just more spit in the wind.

    It’s kind of like the health care debate. Nothing really reformative will happen because of lobbies and campaign laws.

    Let’s face it, we are getting ready for a trip to the abyss of public rebellion. Unless our leadership wakes up to the vast moral hazard confronting them, revolution is probably inevitable. It won’t be pretty, if and when it happens.”

    I believe that this is substantially a good comment on your article. I love you guys, but when are we going to wake up to an America that is so far out of balance that it can’t be repaired WITHOUT REVOLUTION!! I hope maybe, if you and Stiglitz, and a few more are able to capture the high ground in the debate and wake up our leaders.

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