"Plans to improve banking regulation focus too much on bonus curbs and capital buffers, ignoring the need to divorce risky investment banking from the 'very safe and boring' business of commercial banking, an OECD official said.
"The OECD's Adrian Blundell-Wignall told Reuters that riskier banking businesses should pay the higher cost of capital for their activities, and not make inflated profits subsidised by cheaper funding from more conventional operations."
This is basically back to Glass-Steagall, it seems. But the world has changed. I don't see how you can really separate the two, unless you really place restrictions on a whole host of actions by commercial banks. In this last crisis, many of the problems were associated with securitization which moves assets off the books. Would this official ban securitization too? Essentially, modern financial instruments make the distinction between commercial and investment banking fuzzy, if not obsolete. So I think he's getting things very wrong.
He's right that focusing on capital buffers and compensation caps isn't enough to fix the problem. He's also right that the problem is contagion risk (of course it is!). But trying to control corporate structure -- which he claims is the issue here -- is not what it's about, except to the extent that corporate structure includes leverage. But leverage is where capital buffers come in. This guy is talking about restricting a firm's product line. but why do that? Why should a firm be forced to offer only certain types of financial products?
The real issue, to my mind, is making the markets for financial products more competitive and that means transparency and disclosure, as well as rules for a level playing field -- all of those have been missing from many derivative markets. My prescription is getting market institutions right, rather than putting controls that may increase inefficiency and anyway be circumvented.
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