Saturday, February 04, 2006

Reco. to Federal Reserve

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no more risky business after this:my feedback to the Federal reserve

With this posting I will put this risk business behind me forever and move on to newer pastures.It will bring closure to my posting of 2 days ago and I wont ever think about it ever:) And what good is thinking about it if you cant change one damn thing? "The philosophers have only interpreted the world- the point however is to change it":)).Am i a philosopher or a change agent or neither:))

With Bernanke coming on board he needs to in addition to the much touted interest rates business also worry about some of the more pressing issues in the supervision and regulation of banks and other institutions.

Safeguard against systemic risk: The Federal Reserve needs to safeguard against systemic risk deriving from concentrated fast growing sections of the financial market, such as those for OTC derivatives which are increasingly confined to just a few large dealers. Another source of short term systemic risk arises from the fact that the entire government securities clearing segment as well as the housing mortgage segment is dominated by a handful of institutions which increases vulnerabilities for systemic crisis. A new risky trend, given the increasing trend investing in unregulated vehicles such as Hedge Funds, increases the role the Federal Reserve will have to play in the next 2 years in protecting investors from opportunistic behavior.
Interagency Regulation: The Federal Reserve needs to put immediate plans in place to take lead in steering interagency regulation. It has an important intermediate role in enhancing the efficiency of the financial system, and achieving a broad range of social objectives.

Banking Regulation: The high concentration of consumer assets with a few large (top 20) banks should be of concern to the Federal Reserve over the next few years. It must continue to exercise oversight of the affairs of banking institutions in the form of inspection and examination of the institutions for compliance with a broad set of safety and soundness standards. It must reexamine the role that deposit insurance has played to provide protection against losses for small depositors and investors. It needs to reexamine its existing policies as banker of last resort and provider of emergency liquidity facility as well as existing capital adequacy standards in the light of

On the banking supervision front there is a pressing need to strengthen credit risk-management practices in financing of commercial real estate and has been the highest category of loan growths. Such concentrations in exposure have resulted in crisis in the past and there is need to strengthen oversight. The Federal Reserve needs to continue to implement the interagency recommendations of sound practices for Financial Markets.

Given the war on terror and the dangers of another terrorist attack it needs to focus on business continuity services in emergencies for recovery and ensure resumption of clearance and settlement activities in wholesale financial markets. Going beyond business continuity the Fed must insist on more risk-sensitive measure of capital adequacy for the largest 20 banks and apply the new guidelines. The Fed should require and encourage Banks to report their exposures to risk in terms of the market value of their assets, liabilities and off-balance-sheet positions. This will enable customers, creditors and shareholders to evaluate their prospects and react accordingly. They should also be required to report on the risk management and risk control systems in place. The development and use of rating agencies should be encouraged by the Federal Reserve. A major task for the Federal Reserve in public policy will be to ensure that financial regulation does not distort or stifle rapid and beneficial innovation, while responding appropriately to the challenges that financial innovation will pose

Budget deficit: On a non institutional front the weak job growth and a ballooning budget deficit are important problems facing the economy . With consumer debts rising in relation to household income, a further rise in interest rates would increase household debt service burdens and could push financially strapped families over the edge into bankruptcy (especially if unemployment stays as high as it is now). The Fed needs to balance consumer spending, which is good for the economy, with the potentially ill effects of rising debt.Unless the economy expands drastically in the next two years, and that appears unlikely, tax revenue will not increase and unless discretionary spending is cut there is a risk of budget deficits further increasing. Keeping a balanced budget would be a short to intermediate term concern but the Fed would not be able to influence programs for Government spending. It is important that it is able to bring about a more balanced budget. Unrestricted increases in government spending will crowd out the market for private investment and result in overall rise in long term interest rates. This will adversely affect investment decisions for the future. Bernanke should use his office to encourage congress to bring about spending cuts.

Social Security & Medicare: If the social security system is to survive in its current form, either real benefit must be curtailed, or real taxes increased. The Fed may not be able to solve this problem on its own but it should decidedly raise concern for Congress to have the political will to confront this issue. A primary cause of social security's funding imbalance stems from the fact that, until very recently, the payments into the social security trust accounts by the average employee, plus employer contributions and interest earned, were inadequate, at retirement, to fund the total of retirement benefits. This has started to change. Under the most recent revisions to the law, and presumably conservative economic and demographic assumptions, today's younger workers will be paying social security taxes over their working years that appear sufficient to fund their benefits during retirement. However, the huge unfunded liability for current retirees, as well as for much of the work force closer to retirement, leaves the system, as a whole, badly under funded. . Given President Bush’s public stance that existing retirees or those approaching retirement will not be adversely affected the Federal Reserve has a responsibility to frame this issue for Congress’s agenda.

Monetary Policy: Since the primary purpose of the Federal Reserve is to ensure sustained growth and stability by regulating the supply of money and credit to the economy it now faces the challenge to stop raising the real federal funds rate

Foreign Capital: The has become so dependent on foreign capital inflow that were such reversals, or even a significant slowdown, to take place it could set off a financial crisis leading to a recession. This is a source of risk The Fed also needs to be concerned at a stage that many governments have accumulated large amounts of dollar-denominated debt and they may be less willing to fund future current account deficits. Therefore the Fed needs to act to increase national savings and employ other fiscal tools to incentivate people to save more.

Payment Operations: The Fed's ability to conduct monetary policy and bank regulation has been accused of being compromised by the need to manage its nationwide payment operations. Technology is rapidly changing the way payments are made. Removing all responsibility for processing retail payments from the Fed would permit it to concentrate fully on performing its vital public functions. It must instead strengthen the role it plays as serving as the banker's bank, the government's bank, the regulator of financial institutions, and as the nation's money manager over the next 2 years

New forms of risks: There is also a need to push for deposit insurance reform so that free riding by banks through government guarantees is reduced and depositories are treated the same way. As financial services firms adopt new product lines, enter new markets and lose the protection of traditional industry barriers, managing risk has become a major concern. In today's financial markets, many firms offer products and services that cross what had once been traditional boundaries. As a result, they must now manage default, interest-rate and market risks as well as risks associated with liquidity and operations. The Federal Reserve must become itself more aware over the next 2 years of these categories of risks if it is to extend effective oversight

Over the coming few years’ market discipline will slowly substitute for prudential regulation. Having said this in the shorter term increasing emphasis must be placed on developing investor trust and proper market values throughout the regulatory process and improved disclosure. Another source of risk to the financial system is fraud. The last few years has seen an increase in governance, accounting, and legal compliance failings in publicly held companies and mutual funds. This is a bad trend that can adversely affect the financial markets. Innovation in risk transfer products brings new challenges to risk management issues. The Federal Reserve needs to work even more now than ever before with the banks they supervise to strengthen capacity in training its examiners to identify violations of non-banking laws, compliance with tax codes, independent legal or tax analysis of transactions etc. In many respects the infrastructure of any regulatory regime is the people that enforce and oversee regulations that have been put in place by the political process. In this changing financial sector, investments must be made in this infrastructure to insure that the regulatory staff is cognizant of global market trends and are capable of assuring the health of institutions under their regulatory mantle

An area of importance for example is the Gramm-Leach-Bliley Act allowed banks to affiliate with insurance underwriters and insurance agencies. To date, about 630 bank holding companies have chosen to become financial holding companies. Federal Reserve has little expertise in supervising insurance companies and needs to augment is capacities over the next two years

i will email this post to him


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