Sheila Bair: We Are Better Off Having Dodd-Frank
Sheila Bair was appointed by President George W. Bush to chair the FDIC in 2006. After leaving the post last year, she formed a new group of financial experts to monitor and encourage regulatory reform of U.S. capital markets focused on systemic risk. Talking to Bill Moyers last week, she says Dodd-Frank is a good thing:
We are better off having it than not having it… A lot of it it’s up to the regulators in terms of how they implement it. And I think there have been some strengths and weaknesses. There’s not been enough coordination. I think the Financial Stability Oversight Council, which is comprised of all the individual regulators, needs to exercise more leadership in coordinating these rule makings and prioritizing them. I had actually suggested the Financial Stability Oversight Council when I first testified on Dodd-Frank before it became law.
But I had envisioned an independently chaired council that had its own rule writing authority to write system-wide rules. So you end this interagency negotiation that the industry frankly exploits, I mean, they will play– try to play one regulator off of another. So that’s one of the things in Dodd-Frank I’d like to see changed. But not withstanding that, FSOC, this council does have significant powers and they need to exercise leadership in getting these rules done.
She has also argued that in some cases banks are not too big to fail:
I think the complexity is more of a problem than size. A bank, even a very large bank that takes deposits and make loans, I really don’t worry that much about them. But a bank that’s into investment banking and securities trading and derivatives market making and insurance in addition to doing the bread and butter commercial banking, I think those are too complex to manage.
At a minimum, I think there’s regulatory authority to get this high risk activity outside of the insured bank, the bank where there’s direct government exposure with insured deposits. It’s called ring fencing, but I wish for insured banks we would just keep their business to making loans, you know, payment processing is legitimate, trust activities, those are the kinds of traditional things that commercial banks do.
This derivatives market making, securities trading, investment banking, all of that should not be done inside of an insured bank. Insured deposits should not be used for that activity. Whether that activity has economic worth or not we can debate another day.
The crash of 1929 happens in 1929 [and] Glass-Steagall, which reforms Wall Street in a radical way, doesn’t happen until 1933. There aren’t even proper hearings on Capitol Hill about the crisis of ’29 until I think late ’32. And so it’s not that surprising it’s taken a while.
And will take a while more. Bair’s group, a project of The Pew Charitable Trusts and CFA Institute, is called The Systemic Risk Council.