Last week, in anticipation of the Labor Day weekend meeting between finance ministers from the 20 largest world economies, the Treasury Department released a new white paper [PDF] on banking regulation, and specifically its desire to impose tougher standards on banks. Ezra linked with the headline "Geithner Goes After the Banks," Kevin Drum suggested that Treasury Secretary Tim Geithner is "singing the right songs," and Pat Garofalo observes that Too Big To Fail firms are subject to even higher capital requirements. All these things are true, and good, assuming that the Administration is successful in getting the international agreements necessary to implement their proposals ratified abroad and in congress. (So far, so good). But it's important to understand that the elements everyone is so excited about have been part of the Administration's plan since June (the only principle not referenced, I think, is the smart idea to make regulation more counter-cyclical, which is drawn from this summer's practical experience with the credit crunch). In fact, creating new regulation requirements for Too Big To Fail firms has been criticized from the Left as not going far enough because it doesn't take direct anti-trust action. The latest document is just an elucidation of principles that Treasury had already adopted -- and took a lot of flack from the financial sector for proposing. (For instance, Felix Salmon has suggested that higher capital standards will help rein in out-of-control executive pay.) Given that, it's nice to see folks on the Left giving Geithner credit for smart proposals that, in the words of the June document, "compel these [Too Big To Fail] firms to internalize the costs they could impose on society in the event of failure." Before now, the proposed rule changes seem to have gotten lost amid all the (sometimes justified) furor about controversial structural changes. But in the tripod of financial regulation -- the institutions, the rules themselves, and the regulators -- rules are equally important, perhaps even most important, if they are written in such a way to limit the discretion of regulators to relax them. Update: Just read Simon Johnson's latest article on the Fed at TNR, which suffers from the same strange conclusion that the administration hasn't talked about capital requirements. Johnson concludes, rightly, that we need to raise capital standards at banks, and then implies that the Treasury Secretary doesn't want that to happen. Here is Treasury's June outline [PDF] (presumably, Johnson's article was written before this weekend's more detailed release):Capital requirements have long been the principal regulatory tool to promote the safety and soundness of banking firms and the stability of the banking system. The capital rules in place at the inception of the financial crisis, however, simply did not require banking firms to hold enough capital in light of the risks the firms faced. Most banks that failed during this crisis were considered well-capitalized just prior to their failure.The document then outlines basic requirements for both Too Big To Fail and regular firms to hold on to more and safer capital, so it's hard to understand why Johnson thinks Geithner, who also agrees with Johnson about giving the Fed broader systemic authority, doesn't get it. The Treasury Secretary hasn't talked about Johnson's other two good proposals, limiting conflicts of interest and increasing personal liability for bank executives.
-- Tim Fernholz
