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I had actually started a post on regulation last night, but I lost it when I shut down the computer. It does not seem to actually be a Labor of Hercules to design a regulatory system with better incentives. Lots of low hanging fruit.

For starters the Fed has plenary regulatory powers over banks. It can pull the banking license of any bank at any time for reason. But even more insidious, as the Fed is the creator of all fiat money it can and does set the terms for which that money is made available. At present those terms are VERY favorable. To guard against insolvency the Fed has stuffed banks with excess reserves. Better yet it pays a tenth of a percent interest on those reserves the banks keep on deposit with the Fed. Free interest bearing money!

For starters the Fed could stop paying interest on that money to any who have questionable lending and escalate from there. The riskier an institution's financial activities are the higher the interest rate the Fed could charge for new money. This is ultimately a matter  of political will, so the Fed would need to be under pressure from Congress and the Administration.

But there is more! The Fed could demand that certain incentives and disincentives be put in place for corporate officers. The risk officer's bonuses could be based on the accuracy of their forecasts. Loan officers could have their compensation based on a salary plus a calculation of both the profitable and unprofitable loans they approved with claw-backs from previous years in case of really large losses, including from their retirement funds. Then they would become concerned with  the life of the loan.

It would be instructive to see what compensation practices actually are for financial institutions at present.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 30th, 2021 at 03:22:52 PM EST
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