JP Morgan Chase 2010 Annual Report Download - page 25

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For the implementation of Dodd-Frank to
be eective, it must recognize the improve-
ments that already have been made and
focus on resolving what remains to be done.
Dodd-Frank creates several additional regula-
tors and sets forth more than 400 rules and
regulations that need to be implemented
by various regulatory bodies. In addition to
theserules,therewillberulesfromEuropean
governments and new capital and liquidity
requirements emanating from Basel.
Weallhaveahugeinterestinboththe
stability and growth of the system. And we
know that our chances for a strong global
recovery are maximized if we get the rest
oftheregulatoryreformeortright.We’re
getting close – let’s not blow it. Moving
forward, here are some important issues
that need to be handled carefully.
The new oversight board — the Financial Stability
Oversight Council — needs to require coordination
among all the regulators, both domestic and global
Ideally, America should have streamlined
its regulatory system. Instead, our legisla-
tors have created several additional regula-
tors. This makes domestic and international
coordination both more complex and even
more critical. In fact, many of the regulators
are setting up departments to deal with the
other regulatory departments (if that is not
the very definition of bureaucracy, I don’t
knowwhatis).
It makes it all the more important that the
new oversight board, the Financial Stability
OversightCouncil(FSOC),fosterstrue
coordination among the regulators’ activi-
ties.Unfortunately,therealreadyissome
evidencethattheCFTCandtheSECare
moving in dierent directions in their regu-
lation of like products. The FSOC should nip
this problem in the bud.
In addition to domestic coordination, the
FSOC must ensure that the rules and regu-
lations coming from Basel and the G20 are
implemented in a consistent and coordinated
fashion. The FSOC also must be vigilant in
identifying imbalances within the system that
generate excessive risk – and be ready to take
rapid action to fix such imbalances. Finally, it
needs to be aware of the development of new
shadow banks and be prepared to intervene
when they pose potential risks to the system.
Regulators should build a system that creates
continuous improvement
There are implicit diculties in trying
tocreate“perfect”rules.Whatregulators
need to do is put a system in place that
can respond in real time to changes in the
marketplace, create a culture that promotes
continuous improvement, and design eec-
tive tools that operate as both gas pedals and
brakes. This is what will enable them to do a
better job managing the economy.
Herearejustafewexamplesofeective
tools and uses: The ability of regulators to
change mortgage loan-to-value ratios up or
down if they thought the housing market
was becoming too frothy; change capital
requirements immediately on specific loans,
investments or securities when specific asset
classes showed signs of becoming problem-
atic; and dial up or down certain liquidity
requirements and repo haircuts when
excesses were taking place.
The Volcker Rule needs to leave ample room
for market-making — the lifeblood of our capital
markets
The Volcker Rule has various components.
Wehavenoissuewithtwoofthese:the
component eliminating pure proprietary
trading; and the component limiting banks
from investing substantial amounts of their
own capital into hedge funds.
Our concern largely is with a third aspect
regarding capital and market-making. It’s
critical that the rules regarding market-
making allow properly priced risk to be
taken so we can serve clients and maintain
liquidity. The recently proposed higher
capital and liquidity standards for market-
making operations – the new Basel II and
Basel III capital rules – approximately triple
the amount of regulatory capital for trading
portfolios inclusive of market-making and
hedging activities. For the most part, these
capital rules protect against excessive risk
taking.Wedon’tbelieveanyadditionalrules
are needed, under the Volcker Rule or other-
wise.However,iftheremustbemorerules,
these rules need to be carefully constructed
(e.g., they should distinguish between liquid
and illiquid securities, allow for hedging
either on a specific-name or portfolio basis,