Don't Fear Fed Regs

While the world continues to be distracted by the sideshow over executive compensation, there was finally a bit of good news from Washington yesterday. The House Financial Services Committee (in conjunction with the Treasury Department) finally released details of financial regulatory reform. Under the proposal, the Fed would become the primary systemic risk overseer, with input from a council of regulators. I like to think of this as the nation's superheroes--admittedly, a somewhat aspirational vision.


The proposed legislation gives the FDIC resolution authority--that is, the power to resolve financial holding companies that fail. Instead of the taxpayers being on the hook for the bill, the burden of bailouts would be on the financial industry itself. Firms with more than $10 billion of assets would pay for the rescue or unwinding of a collapsed competitor.

The legislation beefs up the Fed's power to impose increased capital requirements, which will face stiff resistance from the banks. Wall Street will cry that higher capital requirements will impede their ability to lend. That's true, but what they're really worried about is if the government requires more money to be held in reserves, it will limit bonus pools.

In the long run, higher capital requirements and resolution authority should help stabilize the financial system far more than limiting compensation. And to those who will squawk that the legislation gives the government too much power, don't fear the Fed. After the past few years, isn't it preferable that the regulators have the power, not bankers?

Image by Flickr User Olaf, CC 2.0