The Squam Lake Report: Observations from two policy professionals
The Squam Lake Report (SLR) contains a host of recommendations to "fix the financial sector." A credible fix must take on the excessive risk-taking of financial institutions created when uninsured creditors of important financial institutions expect government protection from loss (i.e., the too-big-to-fail problem). The vast majority of SLR's recommendations constitute important contributions to addressing TBTF; the analysis offered in support of recommendations is sound and brings modern economics and finance to bear. The clarity and focus of SLR offers a model for academics writing for a policy audience. We differ in emphasis with SLR on a few issues, including capital and living wills, but support moving forward with the core of SLR's recommendations even in these cases. Legislation (i.e., "Dodd-Frank") seeking to fix the financial sector became law around the time SLR was published. The legislation includes in one form or another the predominance of credible recommendations made to address TBTF, including the majority of those in SLR. The ultimate success of the legislation, however, depends on implementation. We hope the government focuses on a macroprudential regime that reduces fallout from financial spillovers, considers new efforts to measure and tax expected TBTF subsidies, and reconsiders aspects of Dodd-Frank that expand the safety net. Given the stakes, another SLR-caliber effort, this time centered on Dodd-Frank implementation, promises high returns.
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- Gary H. Stern & Ron Feldman, 2009. "Macrostability ratings: a preliminary proposal," The Region, Federal Reserve Bank of Minneapolis, issue Sep, pages 12-17.
- VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
- George Pennacchi, 2010. "A structural model of contingent bank capital," Working Paper 1004, Federal Reserve Bank of Cleveland.
- Gary H. Stern, 2009. "Better late than never: addressing too-big-to-fail," The Region, Federal Reserve Bank of Minneapolis, issue June, pages 2-7.
- Christopher Phelan & Douglas Clement, 2009. "Incentive compensation in the banking industry: insights from economic theory," Economic Policy Paper 09-1, Federal Reserve Bank of Minneapolis.
- Ron Feldman, 2010. "Forcing financial institution change through credible recovery/resolution plans: an alternative to plan-now/implement-later living wills," Economic Policy Paper 10-2, Federal Reserve Bank of Minneapolis.
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