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Mon March 5, 2012
Are Bankers Crying Wolf About Regulations? (Part II)
Originally published on Mon March 5, 2012 4:22 pm
Regulation can drive a bank's business overseas, as Adam Davidson writes in his latest column. So when should we take Wall Street's complaints seriously? We posed the question to two economists on different sides of the debate - Charles Geisst of Manhattan College and Mark Calabria of the Cato Institute.
Mark Calabria's response is below. See Charles Geisst's response here.
It's rare to find someone in Washington who is both knowledgeable and unbiased. Generally lacking such, we are better off incorporating the views of obviously biased, but informed parties, rather than relying solely on the views of the uninformed.
We need a regulatory process informed by the broadest range of views possible, including the views of banks. Of course the views of banks, as well as anyone else, should be subjected to skepticism and careful analysis. Recent bank complaints about the Dodd-Frank Act should be viewed in that light - as informing, but not dominating, the debate.
For example the banks' criticism of the Volcker rule, which seeks to limit the trading activities of commercial banks, should be weighed against the evidence of whether such restrictions actually improve bank safety or not. Statistical analysis has suggested that allowing banks a greater range of activities actually improves financial stability and reduces the occurrence of crises.
Additionally Dodd-Frank pushes the trading of derivatives away from banks and towards centralized clearinghouses. The relevant question is whether clearinghouses are better able to manage that risk. The evidence suggests that they are not. Worse still, centralizing risk in clearinghouses will create additional "too-big-to-fail" entities.
The problem with the Dodd-Frank Act is that it expands upon the existing framework of handing regulators vague, broad and general discretionary authorities. Bankers, as well as the general public, have good reason to push back on these rules, and we should take their complaints seriously.