CFTC Commissioner J. Christopher Giancarlo said,
At the heart of the 2008 financial crisis was the inability of regulators to assess and quantify the counterparty credit risk of large banks and swap dealers. The legislative solution was to establish swap data repositories (SDRs) under the Dodd-Frank Act. Although much hard work and effort has gone into establishing SDRs and supplying them with swaps data, seven years after the financial crisis the SDRs still cannot provide regulators with an accurate picture of bank counterparty credit risk in global markets. That is because international regulators have not yet harmonized global reporting protocols and data fields across international jurisdictions. Certain provisions of Dodd-Frank actually hinder such harmonization, despite widespread bipartisan legislative support for their correction over the past two Congresses.
Pointer from Timothy Taylor. Read the whole speech, which is wide-ranging and thought-provoking. Among other topics, Giancarlo discusses the significance of blockchain and the outsized role of the Fed in key securities markets due to its enlarged balance sheet.
My view is that the financial market is a complex, adaptive system, and attempts to reduce systemic risk will backfire. Several years ago, I focused on the discrepancy between knowledge and power. Regulators seek more and more power, and at times they get it. But what they really lack, and will never possess, is the information needed to understand market processes well enough to be able to predict the ultimate effect of regulation on behavior. That information is dispersed, so that no one individual or regulatory body can obtain it.
“the inability of regulators to assess and quantify the counterparty credit risk”
I assume there is some evidence they actually tried and that there was some policy mechanism attached to some lever.
By the way, if we all owed someone else our entire revenue, in other words, everyone has 100% counterparty risk, wouldn’t (most) economists say there is no problem? As long as everyone can keep paying, what is the problem? The problem is when someone can’t pay. But how is the actual risk predictable? It is is based on predicting a catalyst and timing, which is basically not predictable over and above the market’s prediction. Isn’t it a fool’s errand based on pretty basic economic theory? The better approach would be allowing markets to develop whereby the “heroes” can buy or sell at a profit to the “villains'” losses. Which brings us to when are politicians ever going to be heroes in the sense that the heroes have to be contrarians?