Regulators Nervous About the Next Bailout

From: The Atlantic

This summer’s massive financial regulation bill ended “too big to fail” and bailouts for good, right? While we can certainly hope that such pleasant fantasy is closer to reality than fiction, regulators are becoming increasingly worried that the legislation may have merely transferred some of the catastrophic risk contained in big banks to clearinghouses.

The new regulation bill forced most derivatives to go through clearinghouses, which might render those organizations the new “too big to fail” concerns. The Wall Street Journal devotes a recent op-ed to noting that some regulators have become increasingly concerned about clearinghouses, including Federal Reserve and International Monetary Fund officials. WSJ’s editors warn:

Add it all up and you have a disturbing number of financial eminences suddenly rushing to get clearinghouse warnings into the public record. Do they know something that the taxpayer doesn’t? It’s hard to tell, because even as the Beltway crowd scrambles to draft clearinghouse warning memos for posterity–and for their posteriors–regulators are also promoting “independent director” rules that will discourage people with knowledge and experience from overseeing these institutions. This is the last thing regulators should be doing if they now understand the risks.

In other words, clearing houses may become big seeping sacks of systemic risk. And if they do, a new crises will eventually ensue, forcing regulators to turn to another bailout.

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