Geithner Is Overreaching on Regulatory Power

[ScreamingEagle]

One of the main proposals in the regulatory reforms outlined by Treasury Secretary Timothy Geithner yesterday would give the Treasury, FDIC and the Fed authority to take control when investment banks or other financial institutions (hedge funds, etc.) appear troubled, just as the FDIC presently does with deposit-taking banks.

The proposal is being offered as a clever political solution to the turf war that might have erupted if the Treasury or FDIC alone were given this quasi-nationalization authority, with no input from the Fed. But the real issue is whether this expansion of regulators' powers is wise. It isn't.

Start with the FDIC's performance in practice. One would suspect that the government might not be a shrewd player in the banking business, and recent events confirm that suspicion. IndyMac, for example, was not taken over by the FDIC until long after it was obvious that it should be closed, and current estimates of the cost to taxpayers approach $10 billion. Shortly after the IndyMac failure, moreover, the FDIC brokered a deal to sell Wachovia to Citigroup at a lowball price and wound up with egg on its face when Wells Fargo emerged with a vastly superior offer. We could continue.

There's also significant room for principled skepticism based on economics and law. Indeed, the case for broadening regulators' oversight to include investment banks and other financial institutions is based on three flawed assumptions.

The first is that the same factors that justify expansive powers to close banks and take control of their assets are equally applicable to investment banks and other financial institutions.
....
The second flawed assumption is that our bankruptcy laws are not adequate for handling defaults by investment banks or other financial institutions.
....
The third flawed assumption is that financial firms flirting with distress are somehow worse decision makers than federal regulators.


Diebold and Skeel Say Timothy Geithner Is Overextending the Regulatory Power of the Fed, Treasury and FDIC - WSJ.com

 

[waltky]

"We're from the gov't -we're here to help you...

Bernanke Says Bank Overhaul Will Help Small Banks
Wednesday, March 23, 2011 Washington (AP) - Federal Reserve Chairman Ben Bernanke told a group of small-bank executives on Wednesday that the financial overhaul will benefit their institutions because it will level the playing field with the industry's giants.

Bernanke said it would be important for the banks to adapt to the changing regulatory environment, in remarks prepared for the annual convention in San Diego of small- and medium-sized banks. Bernanke acknowledged their concerns about the new law. But he said most of the requirements are aimed the country's biggest banks and not them.

Congress passed the regulatory law last year in an effort to prevent a repeat of the 2008 financial crisis. Small-bank executives have complained that it will cost them a lot of money to meet the new rules, even though they were not responsible for causing the financial crisis.

Bernanke said that it was fortunate that Congress had decided to preserve the Fed's regulatory connection to small banks. In one version of the measure, the Fed would have lost the power to regulate small banks. But the law keeps the Fed's powers over small banks and broadened that power to include thrift holding companies. The thrifts themselves will be regulated by the Office of the Comptroller of the Currency. Congress abolished the Office of Thrift Supervision, which was viewed as a weak regulator.

Bernanke said the central bank was happy that it will now have the power to oversee hundreds of thrift holding companies. "We are delighted that, through our supervision, our gathering of economic intelligence and the activities of our community affairs departments, we will be able to remain fully engaged with grass-roots America," Bernanke said.

Source

 

[jgarden]

The Canadian Banking System: Fast Facts
22 September 2010

- The World Economic Forum has ranked Canada’s banking system as the most sound in the world, three years in a row

- Moody’s Investor Service has ranked Canada’s banks as number one in the world in terms of financial strength, two years in a row.

- Canadians have not had to bail out financial institutions, inject capital into institutions, or set up public entities to buy toxic assets – unlike in many other countries.

- In Canada, the vast majority of mortgage loans are prime, and lenders tend to hold a much greater percentage of the mortgages they originate than in the US.

- Canadians are careful borrowers, and mortgage arrears in Canada remain very low (in fact, as of June 2010 only 0.42% of bank mortgages are in arrears).

- In Canada, mortgages with less than 20% down must be insured – unlike in the US.
Banks contribute approximately 3.0% to Canada’s GDP.

- Banks in Canada are well regulated with two primary regulators: the Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada (FCAC) .....

http://www.cba.ca/en/media-room/50-...es/467-fast-facts-the-canadian-banking-system

One would think that by sharing a common border with the country that is recognozed as having the best banking system in the world, the US would at least be taking a long, hard look at what features they could adapt to their own system!

 

[gekaap]

So, explain WHY these are flawed assumptions.

 

[Mad Scientist]

The Canadian Banking System: Fast Facts
22 September 2010

- The World Economic Forum has ranked Canada’s banking system as the most sound in the world, three years in a row

- Moody’s Investor Service has ranked Canada’s banks as number one in the world in terms of financial strength, two years in a row.

- Canadians have not had to bail out financial institutions, inject capital into institutions, or set up public entities to buy toxic assets – unlike in many other countries.

- In Canada, the vast majority of mortgage loans are prime, and lenders tend to hold a much greater percentage of the mortgages they originate than in the US.

- Canadians are careful borrowers, and mortgage arrears in Canada remain very low (in fact, as of June 2010 only 0.42% of bank mortgages are in arrears).

- In Canada, mortgages with less than 20% down must be insured – unlike in the US.
Banks contribute approximately 3.0% to Canada’s GDP.

- Banks in Canada are well regulated with two primary regulators: the Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada (FCAC) .....

The Canadian Banking System: Fast Facts

One would think that by sharing a common border with the country that is recognozed as having the best banking system in the world, the US would at least be taking a long, hard look at what features they could adapt to their own system!

That will never happen as it takes power away from the Private Federal Reserve Bank.