Risk is Risk, On or Off Balance Sheet

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by Kermit Schoenholtz and Paul Wachtel

The derivatives rules in the Senate financial reform bill pose a serious threat to the financial system because they leave critical institutions - including but not limited to derivatives clearinghouses - without a lender of last resort. A major feature of the legislation prohibits any "swaps entity" from receiving federal assistance such as deposit insurance or access to the Federal Reserve's lending facilities. The bill will force banks to spin off their derivatives activities into separate corporate entities. Yet, sweeping the risks inherent in derivatives trading off bank balance sheets does not make them disappear.

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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).

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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).

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