On the morning of President Obama’s final State of the Union speech, CFLP Faculty Director Michael Barr discusses the unfinished work of financial reform in an op-ed posted on cnbc.com:
In the past, the financial system has contributed to inequality and retarded equitable growth, rather than facilitating it….
There has been progress under the Dodd-Frank Act and global reforms in tackling many of these problems, but much more work needs to be done.
Dodd-Frank and global rules are increasing the amount of capital the largest firms have to hold, with a higher capital surcharge, and in the U.S., higher capital requirements for firms that rely more on short-term debt. But even higher capital requirements would be prudent, as well as an explicit tax on the use of leverage, especially short-term funding such as repo, to offset the moral hazard that comes from essential government liquidity provision in a crisis.
Dodd-Frank puts a cap on the relative size of the largest firms, blocking mergers or acquisitions when a firm hits the cap. These could also be tightened further. New liquidation procedures under Dodd-Frank require a firm’s managers, shareholders, and long-term debt-holders to bear the losses of a firm’s failure, not taxpayers. Living wills, structural reforms and total loss absorbing capacity requirements are making firms more straightforward to resolve. But who will hold the long-term debt and how will knock-on effects be managed?
Building on these reforms, we need further effective steps to regulate the shadow-banking world and curb the use of hot money, including strong collateral and margin rules for securities financing transactions that expose the system to significant risk, and further money market fund reform to reduce the risk of another “bank” run or $3 trillion guarantee in that sector in the next crisis.
Read the full op-ed here.