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Systemically Risky
One of the most popular financial reform ideas these days is to create a systemic risk watchdog. There are, however, conflicting views on how a systemic risk regulator should operate and on the likely the consequences.

SEC Chair Shapiro is concerned that, if given "very broad and deep authority" such a regulator would favor protecting financial institutions at the expense of investors. FDIC Chair Blair favors an interagency regulatory committee and stated that the body must have the "power to write rules." State regulatory officials expressed concern that a new risk regulator may preempt state authority. A Maryland official expressed concern that a creating a systemic risk regulator "masks over the root causes of the crisis" such as allowing financial institutions to become too large and "20 years of a lax regulatory culture."

How should a systemic risk regulator operate? Openly and transparently is the only acceptable answer. Any new risk regulatory authority needs to be exercised based on clear, useful, unbiased metrics which are developed through a participatory public process. Moreover, the focus of any risk regulator should be on requiring enhanced disclosure of meaningful risk-related information. Regulated firms must not be allowed to mislead or under-inform investors on risk issues nor should they be pressured to accept additional risk to aid the government's pursuit of economic objectives.

Based on the financial bailout experience, what is not acceptable is for regulators - and financial institutions - to operate in a shades-drawn, no-fingerprints environment. Policies and actions taken by companies and their regulators need to be consistent and transparent. Anything else is just too risky.

See Dow Jones story

See Reuters story

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