The Reduction of Systemic Risk in the United States Financial System

By Scott, Hal S. | Harvard Journal of Law & Public Policy, Spring 2010 | Go to article overview

The Reduction of Systemic Risk in the United States Financial System


Scott, Hal S., Harvard Journal of Law & Public Policy


  I. SYSTEMIC RISK REDUCTION:
     THE CENTRAL PROBLEM
 II. CAPITAL REQUIREMENTS
     A. CCMR Recommendations Aligned
        with the White Paper
     B. CCMR Recommendations That Differ from
        the White Paper and Pending Legislation:
        How Much and What Type of Capital
        1. How Much Capital: Regulation
           and Markets
        2. What Counts as Capital?
III. CLEARINGHOUSES AND EXCHANGES
     FOR DERIVATIVES
     A. The Ability of the Clearinghouse to
        Reduce Counterparty Risk
        1. Customized or Illiquid Contracts
        2. Contracts Involving Nonparticipants
           in the Clearinghouse
     B. The Optimal Number and
        Scope of Clearinghouses
     C. Ownership of Clearinghouses
     D. Collection and Publication of Data

     E. Exchange Trading
     F. The International Dimension
 IV. RESOLUTION PROCEDURES
     A. The Importance of Resolution Procedures.
     B. What Institutions Should be Subject to
        Special Resolution Procedures?
     C. Imposition of Losses under Special
        Resolution Procedures
     D. Funding the Cost of New Procedures
     E. The International Dimension
  V. EMERGENCY FEDERAL RESERVE LENDING
 VI. REGULATORY REORGANIZATION
     A. Regulation of Systemic Risk
     B. Supervisory Authority
     C. International Developments
CONCLUSION

This Article concentrates on the central problem for financial regulation that has emerged from the 2007-2009 financial crisis--the prevention of systemic risk. The discussion largely focuses on the relevant recommendations of the Committee on Capital Markets Regulation (CCMR) in its May 2009 report. (1) Where appropriate, the Article compares the CCMR recommendations to those of the United States Treasury in its June 2009 report (2) and its suggested implementing legislation, and also to pending congressional legislation. (3)

The CCMR is an independent, nonpartisan research organization founded in 2005 to improve the regulation of United States capital markets. (4) "Thirty leaders from the investor community, business, finance, law, accounting, and academia comprise the CCMR's membership." (5) Its "co-chairs are Glenn Hubbard, Dean of Columbia Business School, and John Thornton, Chairman of the Brookings Institution." (6) The Author of this Article is the Director.

I. SYSTEMIC RISK REDUCTION: THE CENTRAL PROBLEM

Going forward, the central problem for financial regulation (defined as the prescription of rules, as distinct from supervision or risk assessment) is to reduce systemic risk. Systemic risk is the risk that the failure of one significant financial institution can cause or significantly contribute to the failure of other significant financial institutions as a result of their linkages to each other. Systemic risk can also be defined to include the possibility that one exogenous shock may simultaneously cause or contribute to the failure of multiple significant financial institutions. This Article focuses on the former definition because proper regulation could have the greatest potential to reduce systemic risk in this area. (7)

There are four principal linkages that can result in a chain reaction of failures. First, there are interbank deposits, whether from loans or from correspondent accounts used to process payments. These accounts were the major concern when Continental Illinois Bank almost failed in the mid-1980s. (8) Continental held sizable deposits of other banks; in many cases, the amount of the deposits substantially exceeded the capital of the depositor banks. These banks generally held such sizable deposits because they cleared payments, such as checks or wire transfers, through Continental. If Continental had failed, those banks would have failed as well. Section 308 of the FDIC Improvement Act of 1991 gives the Federal Reserve Board powers to deal with this problem. (9) The Act permits the Board to limit the credit extended by an insured depository institution to another depository institution. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Reduction of Systemic Risk in the United States Financial System
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.