Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Stop Big Banks before They Can Lend Again

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Stop Big Banks before They Can Lend Again

Article excerpt

If only the Volcker rule had been in place. If only the Dodd- Frank law had an additional 1,000 pages of rules. If only there had been more regulators at JPMorgan Chase. If only the regulators had done a better job.

Then what? The response to JPMorgan's May 10 announcement of an initial $2 billion loss on a derivatives hedge and/or bet that was being run out of the bank's Chief Investment Office produced a predictable response: We need more rules and regulations.

Why? We have plenty of both already. Pressing the more- regulation default button creates the impression that human beings can anticipate the next new product, asset class or financial innovation and write rules to prevent the next blowup. It also ends up deflecting attention from the real goal of financial regulation, which is not to protect the banks but to shield taxpayers from the cost of any institutional failure.

"Banks' equity capital protects the general public from financial losses much more effectively than regulation," Allan Meltzer, a professor of political economy at Carnegie Mellon University, wrote in a May 17 Wall Street Journal op-ed.

Increasing equity capital to a maximum of 20 percent of assets for the largest banks would serve a double duty, Mr. Meltzer explained to me over the phone. It would protect the public and "make banks think how large they want to be," he said.

He's right, just as he was years ago when he said, "If a bank is too big to fail, it's too big." The best way to counter the trend toward ever-larger banks is to reduce their profit potential by requiring them to hold more capital as a share of their assets. Instead, courtesy of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, we have "systemically important financial institutions" instead of TBTF; a new resolution process outside of bankruptcy protection; enhanced supervision and regulation; and behemoths for banks, such as JPMorgan, with $2. …

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