Regulation debate misses big picture: we should be working to provide as much light as possible on the banking system.
The debate over the Dodd-Frank Act continues to rage as regulators work to create the rules and infrastructure needed to support the new law. One of the more contentious areas is the creation of clearinghouses to regulate over-the-counter derivative securities trading. Earlier this month, Federal Reserve Chairman Ben Bernanke delivered a speech on this very topic during a visit to Atlanta. In the speech, Mr. Bernanke focused his concern on the potential for the clearinghouses to become a systemic risk as opposed to a systemic control on the increasingly opaque world of derivative trading. He noted the following, “the flip side of the centralization of clearing and settlement activities in clearinghouses is the concentration of substantial financial and operational risk in a small number of organizations, a development with potentially important systemic implications. Because the failure of, or loss of confidence in, a major clearinghouse would create enormous uncertainty about the status of initiated transactions and, consequently, about the financial positions of clearinghouse participants and their customers, strong risk management at these organizations as well as effective prudential oversight is essential.”