William K. Black, Associate Professor of Economics and Law at the University of Missouri, Kansas City and a former senior S&L regulator and specialist in white-collar criminology.
What is your take on the so called “Volcker-Rule”? Are the new proposals heading in the right direction?
There is no economic justification for providing federal guarantees to institutions engaged in proprietary trading. Doing so creates a dangerous “put” that encourages fraud and other forms of moral hazard.
Does size really matter? Or are we supposed to talk more accurately about “too interconnected to fail”, if the right approach is to limit the liabilities of financial institutions?
Size matters because the senior regulatory officials think it matters. The key is whether they are willing to place a very large shop in a receivership that wipes out the “risk capital” (shareholders and subdebt holders). They are unwilling to do so in the U.S. If the question is, can a moderately large financial institution pose systemic risk because of its interconnections with other entities the answer is “yes.” Any institution that the regulators treat as “too big to fail” because it poses systemic risk is a systemically dangerous institution (SDI).
What is your suggestion? Who should regulate the banks?
SDIs should not be permitted to continue to exist. We should (1) stop them from growing, (2) shrink them to the point that they no longer pose a systemic risk (use tax incentives to cause them to trim down rather than having the regulators have to dictate the shrinkage strategy), and (3) regulate them far more intensively while they are in the process of shrinking but remain SDIs.
Thank you very much.
William K. Black, Associate Professor of Economics and Law at the University of Missouri, Kansas City and a former senior S&L regulator and specialist in white-collar criminology. He is the author of the must-read book “The Best Way to Rob a Bank is to Own One”.