How to reduce risk on Wall Street? Make the banks pay.

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by Matthew Richardson and Nouriel Roubini

Between the fall of 2008 and the winter of 2009, the world's economy and financial markets fell off a cliff. Stock markets in the United States, Asia, Europe and Latin America lost between a third and half of their value; international trade declined by a whopping 12 percent; and the size of the global economy contracted for the first time in decades.

When economists and Wall Street types toss around the term "systemic risk," that's pretty much what they're talking about. The particular risks that led to the crisis -- i.e., big institutions with too much leverage, too little capital and too many implicit and explicit government guarantees -- were not impossible to anticipate. (In fact, some of us warned about the financial pandemic that was to come.) Now, the question is: How do we keep this all from happening again?

To create a truly safe financial system, we have to focus on two goals. First, we have to drive a stake through the heart of the "too big to fail" mantra that only fattens our financial beasts. Second, we should stop focusing on the problems of individual banks and look at the broader risk that the largest and most complex financial institutions pose.

For the full opinion editorial in Sunday's April 11th Washington Post, please go to the following link

http://www.washingtonpost.com/wp-dyn/content/article/2010/04/08/AR2010040805132.html

 

 

 

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About RegulatingWallStreet.com

The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

About the Authors