Page 1 of 6 123 ... LastLast
Results 1 to 10 of 57

Thread: Obama to Propose Limits on Risks Taken by Banks

  1. #1
    Sage

    Join Date
    Oct 2007
    Location
    New York
    Last Seen
    12-13-17 @ 12:40 PM
    Gender
    Lean
    Centrist
    Posts
    11,691

    Obama to Propose Limits on Risks Taken by Banks

    The New York Times reported:

    The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker, former chairman of the Federal Reserve and an adviser to the Obama administration. The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading...

    Mr. Volcker flew to Washington for the announcement on Thursday. His chief goal has been to prohibit proprietary trading of financial securities, including mortgage-backed securities, by commercial banks using deposits in their commercial banking sectors. Big losses in the trading of those securities precipitated the credit crisis in 2008 and the federal bailout.
    Obama to Propose Limits on Big Banks - NYTimes.com

    IMO, this is a potentially important and welcome development for a number of reasons:

    1. Human nature, being what it is, assures the temptation to pursue large risks will not dissipate.

    2. In spite of the financial crisis and deep recession that occurred from the collapse of the housing bubble, stunning little has changed in the financial sector. Failure to change includes:

    Little sign of fundamental improvements to risk management. A lack of credit growth due to financial constraints and fear has provided the biggest check to risky practices, but once the fear dissipates the underlying risk management framework remains essentially the same

    1. Little evidence that the financial sector is giving substantially greater consideration to history relative to modeling in its risk management practices, even as risk is largely a human nature/behavior + firm/industry structure & linkages problem

    2. The failure to junk, dramatically revise, or narrow the focus of the use of models, including but not limited to VaR (value-at-risk), that performed poorly during the crisis and failed to flag important risks ahead of the financial crisis and, according to some noted economists e.g., Nobel Laureate Joseph Stiglitz, actually amplified risks. IMO, VaR can and should play a modest role in understanding risk, but it should not be the full or even largest answer to understanding risk. In effect, it could offer one set of scenarios, but other methods, including a rigorous and continuing assessment of history and structure, should be a regular part of any robust and dynamic risk management system that incorporates new lessons and evolves as industry and linkages evolve. Such an approach would require more human and financial capital, but the financial crisis is just the latest such event to demonstrate that risk management cannot be completely automated, models (simplifications themselves) cannot provide the whole answer to understanding risk, and models should guide but not replace human judgment when it comes to managing risk.

    3. Bonuses being awarded as a share of revenue not profits in several financial sector firms, in effect rewarding top line growth even if bottom line growth is sacrificed or does not materialize during the compensation period. Down the road, such behavior would lead to a renewed acceleration of credit growth and decline in credit standards.

    4. A Continuing mismatch between bank insurance premiums and the size/risk of such institutions. IMO, just as risk scales with firm size, insurance premiums should scale with size so as to provide a better match between future costs to the insurance fund and a firm's risk.

    5. Absence of accounting reform, to date, that would largely eliminate practices that keep risk off the financial statements, require the grossing of derivatives exposures on the balance sheet, and new financial sector presentation introduced by several accounting professors that would require differentiating between actual outcomes and forecasted outcomes (that's a technical detail that goes beyond the scope of this message, but suffice it to say valuations of certain items are really forecasts based on the assumption that the cash amounts will be realized as they are stated), etc.

    All said, I believe the Volcker approach contributes toward a regulatory structure that would address the financial sector risk/risk management environment as it actually exists, not the idealized idea that predated the rise of the housing bubble prior to the financial crisis.
    Last edited by donsutherland1; 01-21-10 at 08:54 PM. Reason: Fixed an error.

  2. #2
    User
    Join Date
    Jun 2009
    Last Seen
    04-12-12 @ 08:42 AM
    Lean
    Undisclosed
    Posts
    64

    Re: Obama to Propose Limits on Risks Taken by Banks

    The big banks were the ones that survived and were around to take over Bear stearns and countrywide (failed, but not banks). Trading has in fact helped the big banks out of the jam. The real losses were in insurance and autos (not banks). The banks having the most trouble now are small community banks, the thing obama wants to turn the big banks into.This is just populism by a desparate president with no coattails who thinks he found a scapegoat.

  3. #3
    Guru
    nonpareil's Avatar
    Join Date
    Dec 2009
    Last Seen
    07-04-15 @ 10:36 AM
    Lean
    Undisclosed
    Posts
    3,108

    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by donsutherland1 View Post
    The New York Times reported:



    Obama to Propose Limits on Big Banks - NYTimes.com

    IMO, this is a potentially important and welcome development for a number of reasons:

    1. Human nature, being what it is, assures the temptation to pursue large risks will not dissipate.

    2. In spite of the financial crisis and deep recession that occurred from the collapse of the housing bubble, stunning little has changed in the financial sector. Failure to change includes:

    3. Little sign of fundamental improvements to risk management. A lack of credit growth due to financial constraints and fear has provided the biggest check to risky practices, but once the fear dissipates the underlying risk management framework remains essentially the same

    4. Little evidence that the financial sector is giving substantially greater consideration to history relative to modeling in its risk management practices, even as risk is largely a human nature/behavior + firm/industry structure & linkages problem

    5. The failure to junk, dramatically revise, or narrow the focus of the use of models, including but not limited to VaR (value-at-risk), that performed poorly during the crisis and failed to flag important risks ahead of the financial crisis and, according to some noted economists e.g., Nobel Laureate Joseph Stiglitz, actually amplified risks. IMO, VaR can and should play a modest role in understanding risk, but it should not be the full or even largest answer to understanding risk. In effect, it could offer one set of scenarios, but other methods, including a rigorous and continuing assessment of history and structure, should be a regular part of any robust and dynamic risk management system that incorporates new lessons and evolves as industry and linkages evolve. Such an approach would require more human and financial capital, but the financial crisis is just the latest such event to demonstrate that risk management cannot be completely automated, models (simplifications themselves) cannot provide the whole answer to understanding risk, and models should guide but not replace human judgment when it comes to managing risk.

    6. Bonuses being awarded as a share of revenue not profits in several financial sector firms, in effect rewarding top line growth even if bottom line growth is sacrificed or does not materialize during the compensation period. Down the road, such behavior would lead to a renewed acceleration of credit growth and decline in credit standards.

    7. A Continuing mismatch between bank insurance premiums and the size/risk of such institutions. IMO, just as risk scales with firm size, insurance premiums should scale with size so as to provide a better match between future costs to the insurance fund and a firm's risk.

    8. Absence of accounting reform, to date, that would largely eliminate practices that keep risk off the financial statements, would require expensing of stock options and other instruments that dilute shareholder wealth, grossing of derivatives exposures on the balance sheet, and new financial sector presentation introduced by several accounting professors that would require differentiating between actual outcomes and forecasted outcomes (that's a technical detail that goes beyond the scope of this message, but suffice it to say valuations of certain items are really forecasts based on the assumption that the cash amounts will be realized as they are stated), etc.

    All said, I believe the Volcker approach contributes toward a regulatory structure that would address the financial sector risk/risk management environment as it actually exists, not the idealized idea that predated the rise of the housing bubble prior to the financial crisis.

    Great post. But I wonder how they propose differentiating the money from the deposit VS other sort of revenue?

  4. #4
    Guru
    Councilman's Avatar
    Join Date
    Apr 2009
    Location
    Riverside, County, CA.
    Last Seen
    11-04-11 @ 10:16 PM
    Gender
    Lean
    Conservative
    Posts
    4,454
    Blog Entries
    10

    Re: Obama to Propose Limits on Risks Taken by Banks

    I believe that id you are unwilling to take financial risks you are doomed to making less profit.

    However Obama and the rest of the Liberal progressives need to but out of business at every level other than to tall them go ahead and continue as you have in the recent past putting your business at risk of bankruptcy, but know that if you fail you are on your own there will be no more bailouts.

    The free enterprise is at risk from Obama and that is a bigger threat than bank failures. When banks know they have to be responsible or sink they are more likely to be responsible and that is true of any business.

    If you were around in the 70s to see how Detroit ignored the trend to smaller more efficient cars until they were forced to you will know that the minute they could the Big Three went back to big gas hogs and in the mean time Toyota kept making good cars and trucks and now are #1 not GM, who still isn't doing it right but lost control to Obama the UAW anf they will die on the vine now as they should have done already for bad business decisions.

  5. #5
    Sage

    Join Date
    Oct 2007
    Location
    New York
    Last Seen
    12-13-17 @ 12:40 PM
    Gender
    Lean
    Centrist
    Posts
    11,691

    Re: Obama to Propose Limits on Risks Taken by Banks

    Two quick points:

    1. My preference would still be to create scalable insurance premiums and bring full disclosure to accounting (largely eliminate keeping risks off the financial statements, requiring the grossing of derivatives exposures, expensing stock options and other dilutive measures, and providing robust sensitivity analysis in the notes to the financial statements).

    2. The Volcker approach is a fallback.

  6. #6
    Sage
    apdst's Avatar
    Join Date
    Jun 2009
    Location
    Bagdad, La.
    Last Seen
    Today @ 09:20 AM
    Gender
    Lean
    Very Conservative
    Posts
    76,584

    Re: Obama to Propose Limits on Risks Taken by Banks

    Now wait, wasn't PBO just complaining a few weeks ago about banks not making enough loans?

    This is some dumbass regulation in the making.
    Quote Originally Posted by Top Cat View Post
    At least Bill saved his transgressions for grown women. Not suggesting what he did was OK. But he didn't chase 14 year olds.

  7. #7
    Sage
    Erod's Avatar
    Join Date
    Aug 2008
    Location
    North Texas
    Last Seen
    12-16-17 @ 11:47 AM
    Lean
    Conservative
    Posts
    13,073

    Re: Obama to Propose Limits on Risks Taken by Banks

    Just another way to interwine government into the banking process. Obama isn't satisfied that banks are paying back the bailouts, plus interest. Now, he wants to tax them further AND limit their ability to be a privately-run bank.

  8. #8
    Banned
    Join Date
    Sep 2005
    Location
    Los Angeles
    Last Seen
    09-22-10 @ 04:36 AM
    Gender
    Lean
    Independent
    Posts
    11,430

    Re: Obama to Propose Limits on Risks Taken by Banks

    Here's an idea...

    ....tell the banks that the taxpayers aren't backing up their games, and if the bank takes a risk, it's taking a risk with it's own money.

    Eliminate Fanny-Mae and Freddie-Mac and return to a capitalist banking system.

    It's amazing how cautious banks can be when it's their own money at risk.

    And when a bank fails, it doesn't drag the whole country down with it.

    Socialism....always a damn ignorant idea.

  9. #9
    Slayer of the DP Newsbot
    danarhea's Avatar
    Join Date
    Aug 2005
    Location
    Houston, TX
    Last Seen
    Today @ 09:59 AM
    Gender
    Lean
    Conservative
    Posts
    39,764

    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by underdog334 View Post
    The big banks were the ones that survived and were around to take over Bear stearns and countrywide (failed, but not banks). Trading has in fact helped the big banks out of the jam. The real losses were in insurance and autos (not banks). The banks having the most trouble now are small community banks, the thing obama wants to turn the big banks into.This is just populism by a desparate president with no coattails who thinks he found a scapegoat.
    I disagree. The big banks survived because of the Bush-Obama bailouts. These new regulations are the first step in restoring the type of Glass-Steagal regulation that was removed by government, via Gramm-Bliley, and once again walling off sectors of the financial markets from each other, so that one sector does not take the other sectors down with it if it fails.
    Last edited by danarhea; 01-21-10 at 02:01 PM.
    The ghost of Jack Kevorkian for President's Physician: 2016

  10. #10
    Banned
    Join Date
    Jun 2008
    Location
    Canada
    Last Seen
    12-26-10 @ 06:57 PM
    Gender
    Lean
    Independent
    Posts
    8,083

    Re: Obama to Propose Limits on Risks Taken by Banks

    I agree with this move.

    Even in light of the bailouts, banks are not showing us that they are changing their risk management. Do we want another recession down the road?

    If limits are placed on risk, those limits will transmit down to the banker, which means more restrictions on loans. It will make banks consider their clientele more carefully. If there are signs you can't sustain your mortgage payments, then you don't get a mortgage. That's how it should be anyway.

    As for business... one of the reasons why these regulations didn't come into play in the first place was because government doesn't want want to 'hurt business'. Businesses should not get support for being businesses; they should be subject to the tide of the market like individuals are. If you have poor business practice or your industry is phasing out, then why should you get loans or huge subsidies to keep afloat? Banks should not be giving out loans to people or businesses which clearly can't succeed.

    If risk management in the U.S. is not improved, then other nations should gradually shift away from the U.S. currency standard. I understand that the U.S. dollar was popularized in the cold war, but without a central bank to actually attempt to balance capitol assets vs. currency, I don't see how it has long term fortitude. (I know this is separate from the risk management issue, but is still important nonetheless.)

Page 1 of 6 123 ... LastLast

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •