IA-Forum: Your book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, provides a detailed analysis of the Act by you and your economic colleagues. What is your overall assessment of the Bill?
Dr. Acharya: The Dodd-Frank Act is clearly the largest regulatory overhaul of the financial sector in the United States since the Great Depression. What it does for the first time, at least as far as financial regulation in the US is concerned, is to take on the issue of systemic risk, the risk that a large number of financial sectors may collapse at the same time, freezing intermediation to households and the corporate sector. The Act requires that the regulators - in particular, a "Council" of regulators - designate a set of institutions as systemically important financial institutions (SIFIs) and then regulate these institutions with better capital and liquidity requirements. The Act also gives the Council the legislative authority to break them up as last resort. In this sense, given that it shifts the focus away from supervising and managing the risk of an individual institution to thinking about the risk of a system as a whole, I would say the Act is a very important step forward. On this it certainly has its heart in the right place.
But if I could pick one big issue with the Act, it's with its lack of addressing government guarantees. Dodd-Frank believes the primary problem with systemic risk and its creation is the existence of systemically important financial institutions, and their propensity to become too big to fail institutions; but it doesn't pay as much attention to the fact that in many cases this kind of behavior, of institutions to become excessively large or that they are herding, arises in the first place because there are government guarantees in place.
Read the full interview on ia-forum.org
Dr. Acharya: The Dodd-Frank Act is clearly the largest regulatory overhaul of the financial sector in the United States since the Great Depression. What it does for the first time, at least as far as financial regulation in the US is concerned, is to take on the issue of systemic risk, the risk that a large number of financial sectors may collapse at the same time, freezing intermediation to households and the corporate sector. The Act requires that the regulators - in particular, a "Council" of regulators - designate a set of institutions as systemically important financial institutions (SIFIs) and then regulate these institutions with better capital and liquidity requirements. The Act also gives the Council the legislative authority to break them up as last resort. In this sense, given that it shifts the focus away from supervising and managing the risk of an individual institution to thinking about the risk of a system as a whole, I would say the Act is a very important step forward. On this it certainly has its heart in the right place.
But if I could pick one big issue with the Act, it's with its lack of addressing government guarantees. Dodd-Frank believes the primary problem with systemic risk and its creation is the existence of systemically important financial institutions, and their propensity to become too big to fail institutions; but it doesn't pay as much attention to the fact that in many cases this kind of behavior, of institutions to become excessively large or that they are herding, arises in the first place because there are government guarantees in place.
Read the full interview on ia-forum.org
Leave a comment