The Senate Finance Bill

Senate approval of the financial reform bill is a good thing. I disagree with those who argue that it was more important to keep debating the measure and improving it than to get the thing through. What makes anybody think that further debate would have improved it rather than made it worse? And continued inaction is unsettling. There was a lot to be said for prompt resolution (as it were). In any case, the bill was always going to leave lots of discretion to the regulators in framing how the new rules will actually work. It was best to activate the new job assignments quickly, so we will find out what the new rules will be. Even though the bill has passed, for instance, I still don't know whether the Senate measure calls for a Volcker rule. It depends what you mean by a Volcker rule. Even if the Senate language survives, it depends what the Fed and the others subsequently make of it.

One thing I would have traded further delay for would have been simplification of the regulatory structure. The House and Senate bills -- which are a lot alike, fortunately -- both  leave the system at least as complicated as it is at the moment. That was a big part of the problem before the crisis, and if anything it has been made worse. (The council of regulators is a weak solution.) But simplification never seemed to be on the agenda at any stage. That is a shame, and something the architects will come to regret.

Howard Davies and David Green had an interesting column in yesterday's FT. It concentrated on the debate in the UK, but what they say has wider application. They caution that no structure of regulatory responsibilities fared particularly well in the crisis. But they also note, among other things, an important advantage of integrated policy, and the need, in effect, to give central banks a second instrument --  macroprudential regulation -- in addition to interest rates.

But the impact of ratcheting up capital requirements is most likely to be felt in the form of an increase in the cost of credit. Banks will seek to pass on the increased cost of lending to customers, which will in turn restrain credit demand... The impact may not be precisely the same as increasing the short-term interest rate, but if capital requirements are raised across the board, it will be close. So does it make sense for there to be a separate financial policy committee, as seems to be envisaged, to manage macroprudential policy? Surely the decision should be considered alongside interest rate policy, which is a matter for the monetary policy committee. Regarding the two instruments as separate, aiming at two different policy outcomes, looks wrong.

Good point. Something for the US council of financial regulators, once it starts work, to bear in mind.


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