The most wonderful time of the year is always followed by the practice of resolving to improve in the new year. So in the spirit of the season, here are five suggested 2012 resolutions for federal policymakers.
• Define "shadow" banking and publish a list of systemically important firms.
An increasing number of people claim the Dodd-Frank Act did little to curb shadow banking. They warn another crisis is brewing beyond the banks, which are receiving nearly all the regulatory attention these days. But have you ever heard a clear definition of what constitutes the shadow system? Back before the crisis, the phrase used to mean investment banks, but they no longer operate in the shadows because they all became holding companies in 2008 and are now subject to the Federal Reserve's authority and exams.
Money market funds and the repo market are the closest any one gets to identifying the shadow threat and yet both are prominent, well-understood pieces of the financial market.
Dodd-Frank tried to address shadow banking by requiring an umbrella group of regulators it created, the Financial Stability Oversight Council, to publish a list of financial companies that are so big or so interconnected or so dominant in a particular product that their failure could bring down the whole system.
Yet nearly 18 months after enactment, the only firms officially designated as systemically important are the ones cited in the law itself — banks with more than $50 billion in assets. So Comerica and Huntington get tons of scrutiny while GE Capital and BlackRock don't? That makes no sense.
It's not as though the oversight council has ignored its responsibilities. It's taken three swings at this — an advance notice of proposed rulemaking in October 2010, a proposed rulemaking in January 2011 and a second proposal in October 2011. Comments on this latest plan were due Dec. 19, so let's cross our fingers that the council will actually finalize a rule rather than issue yet another proposal.
• Regulators should write proposals that actually lay out what they think a rule should require, instead of issuing requests for comment asking the public what it thinks.
In its own analysis of the comment letters on its January proposal to define "systemically important" the council admitted that the public found it "lacked the necessary level of specificity and detail needed to provide meaningful guidance."
The series of proposals on systemic risk are not an exception. The Volcker Rule proposal from October was just as vague; it posed nearly 400 questions.
Rather than issuing huge proposals full of questions, the regulatory agencies should tell us what they want to do and then let people comment on those ideas.
A related resolution — let's call it Resolution No. 2.5 — is more coordination among the federal financial agencies. What excuse does the Commodity Futures Trading Commission have for not signing on to the Volcker proposal? Is it planning to write its own rule? That also makes no sense.
• The Senate should confirm the Obama administration's nominees for federal regulatory jobs.
The dysfunction surrounding the nomination and confirmation process is embarrassing. President Obama deserves some of the blame for being ridiculously slow in selecting his regulators. But now that he has at least five of them before the Senate, it really must act.
The process leaves people to twist in the wind and the agencies to limp along under acting leaders. It's no way to run a government and it's certainly no way to avoid another financial crisis.
• Is anyone worrying about the downsides of rock-bottom interest rates stretching to mid-2013?
I get that the Fed is keeping rates low in an attempt to spur economic growth, but I worry that we are not paying enough attention to the drawbacks. Are spread-strapped banks being forced to take outsize risk just to keep their heads above water? What are the agencies doing to head this off?
• Cull the rulebooks of outdated requirements.
Every so often one of the agencies launches an effort to get rid of redundant or unnecessary rules and yet nothing ever seems to come of it.
The Consumer Financial Protection Bureau is in the middle of such an effort right now and, maybe as the new kid on the block, it can show the other agencies how to do it. I'm not particularly optimistic, but it would be a cool way for the CFPB to counter the (mis)perception that it's out to get bankers.
The biggest mistake when it comes to New Year's resolutions is setting the bar too high. So notice that I steered clear of resolutions along the lines of "fix the housing crisis." Each of these five goals is doable, and accomplishing them would improve financial oversight and help us avoid another meltdown.
Happy holidays, everyone.