Tim Fernholz asks why the administration is shying away from giving firm guidelines on prudential standards:
While members of Congress take their spring break, the debate over financial reform and, most relevantly, Sen. Chris Dodd‘s omnibus bill simmer here in Washington. Dodd’s bill has raised any number of questions — starting, most fundamentally, with “Are you with the banks or the consumers?” — but perhaps the most confusing debate right now is over the previously obscure issue of prudential standards. (If you’re just joining this debate, read my primer on the effort so far.)
In order to ameliorate risk and avoid bank runs, federal regulators set certain rules for banks: how much they can borrow relative to their assets (leverage), how much capital they need to set aside to pay their debts, what forms that capital can take, even how large they can be. Some of these rules are set by international agreements, but mostly they require the discretion of U.S. officials.
