Elementary Lesson Unlearned
By Rich BlakeMemorandum
To: Congress
From: Sherlock Holmes
Re: The Financial Crisis
CC: President ObamaThe financial crisis highlights the need to improve oversight of leverage at financial institutions and across the system.
Memorandum
To: Sherlock Holmes
From: Anyone who has been Paying Attention to the Financial Industry These Past Few Years
Re: Your MemoNo shit.
“Financial Crisis Highlights the Need to Improve Oversight of Leverage at Financial Institutions and Across the System” was actually the title of written testimony delivered on May 6, 2010, before the House Committee on Financial Services’ Subcommittee on Oversight and Investigations by Orice Williams Brown, director of financial markets and community investment at the United States Government Accountability Office. It is worth reviewing O.W.’s leverage meditation on the day President Obama signed financial reform into law if only to underscore the idea that while Obama may be claiming with a straight face that “because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes” we’re all still looking at a system that, for the most part, remains free to choke on its own vomit.
The quick summary of O.W.’s testimony:
“In 2009 GAO conducted a study on the role of leverage in the recent financial crisis and federal oversight of leverage, as mandated by the Emergency Economic Stabilization Act … as Congress considers establishing a systemic risk regulator, it should consider the merits of assigning such a regulator with responsibility for overseeing system-wide leverage. As U.S. regulators continue to consider reforms to strengthen oversight of leverage, we recommend that they assess the extent to which reforms under Basel II, a new risk-based capital framework, will address risk evaluation and regulatory oversight concerns associated with advanced modeling approaches used for capital adequacy purposes. In their written comments, the regulators generally agreed with GAO’s conclusions and recommendation.”
O.W. goes on to explain something elementary, but which bears repeating, that is, how the crisis revealed limitations in regulatory approaches used to restrict leverage.
More from O.W.:
“Federal regulators have called for reforms, including through international efforts to revise the Basel II capital framework. The planned U.S. implementation of Basel II would increase reliance on risk models for determining capital needs for certain large institutions. The crisis underscored concerns about the use of such models for determining capital adequacy, but regulators have not assessed whether proposed Basel II reforms will address these concerns.”
To repeat, the crisis revealed that regulatory frameworks already in place as of 2007 suffered from severe limitations with respect to being able to effectively monitor hog wild leveraging proclivities among the megabanks; now that there are new frameworks being overlaid on top of those existing flawed frameworks all subject to yet another ambiguous, still-to-be-hashed-out sequel framework elegantly yet cryptically named after a place in Switzerland that is home to the central bank of central banks—it should go without saying that all/any regulators tasked with helping to prevent the next crisis and who are up for really trying to take that task seriously ought to take a leaf through O.W.’s GAO report if they have not already, and start to think about assessing whether Basel II will address these concerns.
