Tags: isaac | regulation | rules | banks

Former FDIC Chief Isaac to Newsmax.TV: US Needs Smarter Regulation, Not More Regulation

Monday, 06 Aug 2012 06:05 PM

By Forrest Jones and Kathleen Walter

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The U.S financial system needs smarter regulation and not just more rules, according to William Isaac, former chairman of the Federal Deposit Insurance Corp.

After the collapse of Lehman Brothers in late 2008, the government rolled out a slew of regulations under the Dodd-Frank financial reform law, giving regulators greater power over bank-capital requirements, liquidity levels and risk-management practices. The law also would also ban banks from trading their own money for profit in capital markets.

The problem, according to Isaac, is that such regulations can't prevent banks from engaging in reckless behavior.

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"We need smarter regulation, more efficient and effective regulation than we have. We need less politicized regulation," Isaac told Newsmax.TV in an exclusive interview.

"These incidents are happening too often and we need much more effective regulation. We also need more marketplace discipline," said Isaac, author of “Senseless Panic: How Washington Failed America.”

Editor’s note: To order ‘Senseless Panic’ at great price — Click Here Now.

Marketplace discipline could check risky banking behavior without throwing regulations onto the economy, which hamper recovery by creating uncertainty and by forcing business owners to spend more time worrying about compliance and less time growing and hiring.

One example would require big banks to issue long-term senior and subordinated debt on a regular basis, said Isaac, a senior managing director of FTI Consulting and Chairman of Fifth Third Bancorp.

"That will force them to go into the marketplace and justify to very sophisticated debt investors who have nothing to gain from the risks these banks are taking, they just want their money back with interest, they will have to go into the marketplace on a regular basis and convince these people that they’re doing the right things with the bank," Isaac said.

"If a large bank fails, or a small bank for that matter, those debt holders should be required to take a haircut or a loss when the bank fails. Then we’ll have some really marketplace discipline over these institutions and we’ll have less of the wild and speculative practices that we’ve seen in the past."

Calls to reinstitute the Depression-era Glass-Steagall Act, which separated investment banks and commercial banks, have grown since the financial crisis of a few years ago.

The law was repealed in the 1990s, which some say led to the creation of today's financial giants that ran commercial banks and investment banks under one roof and gave them size and scope that threatened the stability of the banking sector.

Banning financial institutions from running both commercial banks and investments won't solve the problem, Isaac said.

"I’m very concerned about the size and complexity of the big banks. I don’t think that reinstituting the Glass-Steagall barrier between investment banking and commercial banking would serve any purpose other than to allow unregulated investment banks to go back and create the crisis again," Isaac said.

Meanwhile backward-looking regulatory practices need to go as well.

Take regulations determining how much money banks need to stash in capital reserves.

During a strong period of economic growth, say from 1995 to 2005, mathematical models will look backward and tell regulators banks don't need that much of a financial cushion, ignoring possible red flags forecasting trouble in the future.

"It makes the boom period even stronger than it would otherwise be because banks are not setting aside capital and reserves. And then when trouble hits, as it did in 2007, 2008, the models are now saying that the banks don’t have anywhere near enough capital and reserves and so it makes it much harder for banks to resume lending because they have to build up their capital and their reserves," Isaac said.

"So we’ve got to get rid of those kinds of rules. Mark-to-market accounting is something that was an important contributor to the crisis and it’s something that requires banks to mark their assets to market on a regular basis, even when there’s no market."

Editor’s note: To order ‘Senseless Panic’ at great price — Click Here Now.


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