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April 10, 2013

Not Enough Reform on Derivatives

On Thursday, several bills to pre-empt the regulation of derivatives will be the focus of a hearing in the House Financial Services Committee. The bills, which have already passed the Agriculture Committee, must be stopped if the world is to be made safe from reckless risk-taking by banks. As it turns out, Representative Jeb Hensarling, Republican of Texas and the new head of the Financial Services Committee, may be the man to stop them.

In a recent interview with The Wall Street Journal, Mr. Hensarling outlined a free-enterprise approach to bank regulation that sensibly supported “greater capital and liquidity standards” and better “ring-fencing, fire-walling — whatever metaphor you want to use — between an insured depository institution and a noninsured investment bank.”

One of the bills before his committee would do the opposite of what he envisions. It would gut a provision of the Dodd-Frank financial reform law that effectively requires banks to spin off their riskiest derivatives transactions into separately capitalized uninsured subsidiaries. The spinoff provision, which starts phasing in this year, is important for shielding taxpayers from future bailouts. But the big banks have fought the provision because their taxpayer backing from being both federally insured and too big to fail is part of what makes their derivatives business hugely profitable. If Mr. Hensarling is the free-enterprise advocate he says he is, he will tell the banks that if they cannot profitably do their deals without taxpayer backing, they should not be doing them at all.”

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Read full New York Times article here

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