Friday, February 26, 2010

Governor Daniel K. Tarullo on Financial Regulatory Reform

U.S. Monetary Policy Forum, New York on February 26, 2010

Tarullo said: “But financial stability alone is not the aim of financial regulation”

About time! About 20 years too late! In the 347 pages of the bank regulations known as Basel II there is not one word about any other purpose for our banks than being stable

Tarullo said “Supervisors counted on capital and risk management to be supple tools that could ensure stability”

Absolute nonsense! They created a very crude and simple set of capital requirements based on perceived risks; then outsourced simplistically the risk-watch function to the credit rating agencies; and then they simply went to sleep.

Conclusion: A lot of good thoughts but yet not a word on the true problems with their current regulatory paradigm, being that there are not enough low-risk AAAs to go around for everyone; and that real economic growth and development does not happen in any risk-free AAA land.