Ed Kane on Financial Regulation

The headline on the interview is confusing, but his remarks are not.

She [Hillary Clinton] goes part way toward Senator Sanders in proposing to give regulators more power to break up financial firms. But federal regulators have a lot of authority already. The key is to give them the incentive to use that authority. When a bank is in distress, fear of disrupting the system becomes their dominant concern.

Pointer from Mark Thoma. Kane has been around for a long time, and he has been for right for a long time. In the 1980s, he was among those warning about the weakness of capital requirements and the political power of big banks. The fact that his warnings today are similar tells you that Dodd-Frank and other responses to the financial crisis were not sufficient.

4 thoughts on “Ed Kane on Financial Regulation

  1. I doubt there’s a group of people anywhere (outside of the C-suite at the banks themselves) that has less desire to break up the banks than the permanent staff of the financial regulators. Although the set of people that the mainstream political parties recycle through the ranks of the political appointees at the same financial regulators are probably a close second.

    The argument that regulators currently have the power to break them up is ridiculous. Congress gave them this power because the knew the agencies wouldn’t use it.

  2. “Sufficient” implies they were at least in the right direction. Kane states they may be the wrong direction in that the regulations entrench the too-big-to-fail institutions.

  3. 50% equity capital requirements on Big Banks is the required regulation that creates socially optimal outcomes, or most nearly so.

    Society would have been better off if the bailed out Big Banks+AIG/ insurance had instead gone thru fast track bankruptcy, wiped equity & top management & converted bond debt into new-equity with real but minimal haircuts (bonds after equity).

    Too late now for that, but not too late to promise that in the future. And, in the next crisis, do it. After a few Big Banks get equity wiped, they’ll be a lot more in favor of 50% equity capital requirements for all Big Banks.

    • Is this basically what call “living wills” which is basically the government actually doing their 2nd most important job (after national defense) of precisely defining property rights?

      Have they done anything on this since the crisis? I think they must like not doing anything on the actual solution. Everybody except the victims likes the current situation where the banks and government hold everyone hostage to the threat of ad hoc bailouts.

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