In a policy brief sent to Capital Hill, the Regional Bond Dealers Association called for comprehensive financial regulatory reform, including ending taxpayer funded bailouts of financial institutions viewed as “too big to fail.”
The Association says reform efforts must address the underlying causes of the recent financial crisis, including the use of excessive leverage and inadequate transparency. The new regulatory regime must be able to prevent firms from becoming too big to fail or impose stiff financial burdens on those that already are, including higher capital requirements.
“Congress must take advantage of this opportunity to address the weaknesses in the existing regulatory system that contributed to the most significant financial crisis in decades,” said Mike Nicholas, Chief Executive Officer of the RBDA. “The financial system will only operate efficiently if large firms, rather than taxpayers, are held accountable for the consequences of poor management and risky behavior.”
The RBDA supports several parts of the Wall Street Reform and Consumer Protection Act just passed by the U.S. House of Representatives but the Association also believes the measure falls short because it does not do enough to prevent a firm from becoming a systemic risk in the first place.
“We will be discussing these critical issues with key policymakers in the Senate as that body takes up reform legislation,” said Mr. Nicholas. “We believe any final legislation must include disincentives for any firm intent on becoming too big to fail.”
Among other considerations, firms which become too big to fail, often through excessively risky behavior, actually receive an unwarranted competitive advantage. The capital markets fund these firms at lower rates because they recognize the government will not let them fail and taxpayers will bail them out. The RBDA strongly believes as a firm grows larger and poses a heightened risk to the financial system, there should be a corresponding increase in the firm’s capital requirements. Subjecting firms to stricter capital requirements as they get larger would discourage them from ever becoming too big to fail.
The RBDA is also calling for leverage ratios and capital requirements to be weighted according to the products a firm trades or the positions a firm takes. Activities involving heightened risk should be subject to enhanced capital requirements.
The Association also believes regulatory reform must provide for greater transparency that is based on the extent to which a firm’s products or positions pose risks to the financial system. For example, firms should be required to disclose the amount of mortgage-backed securities they have in their inventories, as well as the ratings of such securities.
“It’s very clear to us,” commented Mr. Nicholas, “Congress must impose significant costs on large, systemically risky firms that outweigh the benefits such firms have received in the past from implicit government protection.”
Read the complete policy brief
