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April 10, 2014

Heroes of Banking Reform

“In the mid-2000s, Sheila Bair, then the chairwoman of the Federal Deposit Insurance Corporation, fought to retain a rule that would limit the amount of leverage, i.e., the amount that could be borrowed, particularly by the largest American financial companies. Among her most difficult opponents were key people at the Federal Reserve and most of the international community involved with bank regulation. (The details are in Chapter 3 of her book, “Bull by the Horns.”)

“The financial crisis made a big difference. Ms. Bair was proved right. Her critics in the United States and in Europe had insisted that a sophisticated “risk-weighted” approach to measuring the adequacy of bank equity capital would suffice. But the risk-weights used, by regulators and the industry, proved repeatedly wrong. Complex derivatives based on mortgage-backed securities and European sovereign debt were rated as AAA (the safest possible); both turned out instead to be highly risky and prone to fall rapidly in value.

“This week, Ms. Bair and the people who agree with her on the need to restrict leverage at our largest banks won a major victory.”

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Read full NY Times Economix article here.

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