Choices in Financial Regulation

The last time I addressed this group – August 21, 2007 – marked the beginning of a tumultuous period.1 The two years since then have been marked by repeated waves of turmoil in financial markets and extraordinary actions by the authorities. As counterparties retreated from various market segments, governments and central banks worldwide responded by providing unprecedented levels of credit and credit guarantees, the broad effect of which has been to shield many creditors from losses. In the wake of this "Crisis of 2007, 2008 and 2009" Congress is weighing proposals that would significantly restructure financial regulation in the United States. Central to the plans being discussed are stricter regulation of institutions and markets deemed to be systemically important and new governmental resolution authority for large, complex, nonbank financial institutions. Participants in the recent G-20 meetings, for instance, endorsed the notion of increased capital requirements for such companies. Given the broad and deep official support the financial sector has received, stiffer capital standards are warranted in order to better align incentives and protect taxpayer interests. But I think it also is worth questioning whether we need to take the level of official support as given.