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Blacking Out on Financial Reform

By Henry Meier

2,260,361: that’s the number oflabor hours one regulatorconservatively estimates that financial institutions will spend implementing the regulations spawned by Dodd-Frank. The estimate came fromRichard W.Fisher, the President of the Federal Reserve Bank of Dallas in aspeechhe gave on January 14th calling for fundamental banking reform. Hepointed outthateven after Dodd-Frank, there are 12 institutions that presently account for 69% of total industry assets and that they are too big to fail because of the threat they pose to the financial system and the economy should even one of them get intotrouble. By contrast, as credit unions know all too well, the vast majority of financial institutions are subject to financial discipline. If they messup, they go out of business.

Fisher proposedsetting up a true firewall between the legitimately guaranteed insured deposits of commercial banking and those activities of investment bankers which should never be given any type of government insurance. So, for instance, banks but not bank holding companies could get access to the Federal Reserve’s discountwindow in theevent of an emergency. In addition, every customer, creditor and counter party of investment banks other than traditional commercial bankers would have to sign a covenant before entering into a financial transaction stipulating that dealing with this affiliate carries no federal deposit insurance or other federal government guarantee.

Proposals like this have been floated before. What’s different now is that they may be reflecting both a political and policy consensus that more needs to be done. This morning, Britain’s Chancellor of the Exchequer, George Osborne,endorsed the ideaof reinstituting barriers between a single company being able to engage in both investment and commercial banking, even suggesting that investment banks and commercial banksshould have separate chief executive officers.

Randall Smith