Congress Should Force Big Banks to Stop Gambling With Our Money
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Chairwoman Lincoln's provisions have the enormous value of getting the vast dealing and trading operations in derivatives out of the shadowy off-balance sheet world where they are now posted by the large bank and investment bank dealers. This will have very substantial systemic benefits for the derivatives market and for the banking system as well. Moving the selling and trading of these instruments into separate entities will increase transparency by bringing derivatives out of the shadows so dealers can be more easily regulated and the prices and volume of purchases and sales in the market will be readily available to counterparties. It will also ensure a better capitalized derivatives market since, as the crisis revealed, there is so little capital backing for the off-balance sheet liabilities of the large banks where the majority of the business is still being conducted. In addition, it will shrink the enormous exposure of a few very large banks that can threaten the stability of other financial institutions and the many non-financial companies that use this market.
Chairwoman Lincoln's amendment is sensible and prophylactic. It goes to the heart of the interconnectedness problem that has been exacerbated by oligopolistic market domination. Requiring a stand-alone structure for dealers will tend to encourage new entrants and bring the benefits of competition to companies that use derivatives in all sectors of the economy. If, as critics of the amendment argue, derivatives have become such a critical part of the financial system in the few decades since their invention, it is time they emerged from underground to be bought and sold in an open market. To permit the ongoing domination of an opaque market by so few banks ensures that the subsidies and bailouts needed to keep these firms viable will also be ongoing. A vote against the
Jane D'Arista and Gerald Epstein are economists at U-Mass Amherst and co-coordinators of SAFER, a coalition of economists for Stable, Accountable, Fair and Efficient Financial reform.