Friday, June 8, 2012

More Light is Needed to Eliminate the Shadow Banki

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While Mr. Bernanke correctly supports the need for strong risk management practices at these new clearinghouses, he side steps one of the primary reasons for creating the clearinghouses. During the height of the financial crisis of 2008, the panic that ensued was driven by the fact that no one knew the true magnitude of the asset values at risk. This was due to the fact that most of the derivative contracts undermining our financial system were unknown. This “shadow banking system” ultimately drove distrust and refusal among market participants to continue working with one another. Without full knowledge and understanding of the nature and risks surrounding these financial instruments, our market will soon experience another crisis event that may not be able to be remedied like the last crisis. To emerge successfully from this dark, financial abyss Cheap NFL jererseys, we should be working to provide as much light as possible on the banking system.

The debate over the Dodd-Frank Act continues to rage as regulators work to create the rules and infrastructure needed to support the new law. One of the more contentious areas is the creation of clearinghouses to regulate over-the-counter derivative securities trading. Earlier this month oakley sunglasses outlet, Federal Reserve Chairman Ben Bernanke delivered a speech on this very topic during a visit to Atlanta. In the speech, Mr. Bernanke focused his concern on the potential for the clearinghouses to become a systemic risk as opposed to a systemic control on the increasingly opaque world of derivative trading. He noted the following, “the flip side of the centralization of clearing and settlement activities in clearinghouses is the concentration of substantial financial and operational risk in a small number of organizations Cheap NFL jererseys, a development with potentially important systemic implications. Because the failure of, or loss of confidence in, a major clearinghouse would create enormous uncertainty about the status of initiated transactions and, consequently oakley sunglasses outlet, about the financial positions of clearinghouse participants and their customers, strong risk management at these organizations as well as effective prudential oversight is essential.”


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