Academic also calling for wind-down of FHA, Freddie Mac, Fannie Mae
The regulations introduced in the wake of the Great Recession have been a flop and the FHA and GSEs need to be wound-down, according to research from a Columbia Business School academic.
"The Great Recession created a rush in Washington to establish guardrails for the financial industry," said Professor Charles Calomiris who added that good intentions, expanded powers, and new mandates don’t necessarily lead to smart policy decisions.
In an article titled ‘Has Financial Regulation Been a Flop? (or How to Reform Dodd-Frank)’ he highlights multiple failures of the post-crisis regulations and calls for several reforms to policy including parts of Dodd-Frank and the Volcker Rule.
“Ten years later, it's clear that the Dodd-Frank Act and further regulations are failing to curb risky behavior while obstructing economic growth. We can do much better than these costly, unsustainable regulations that will do little to prevent a repeat of the financial crisis," adds Calomiris.
Rules create risk, disadvantage
Calomiris argues that the capital requirements and lending rules introduced by Congress and the Federal Reserve have increased both costs and risks for large banks, while smaller lenders are put at a disadvantage by rules and compliance burdens.
Proposed changes that he would like to see include the linking of financial regulation directly to the performance of the financial sector and demonstrate that regulatory costs are justified by measurable benefits.
He is also calling for a restoration of the role of laws and formal rule-making in financial regulation and end the discretionary authority of politicized actors like the FSOC and the Consumer Financial Protection Bureau.
And he wants regulators to be held accountable to the public by requiring transparent regulatory standards.
Formal rule making not guidance
Calomiris wants the use of regulatory guidance to be replaced by formal rule-making.
He is calling on policymakers to delay the further use of stress tests as a regulatory tool until realistic scenario forecasts can be constructed.
He also wants to see the winding-down of the Federal Housing Authority, Government-Sponsored Enterprises like Fannie Mae and Freddie Mac, and Federal Home Loan Banks and replace mortgage risk subsidies with means-tested down payment matching subsidies.
Among other proposed measures are the creation of tax-favored housing savings accounts to further promote affordability of housing and phase in limits constraining banks to < 25% of loans for commercial or residential real estate.
And Calomiris suggests replacing the morass of capital ratio requirements on banks with a single leverage limit and a single minimum ratio of book equity to risk-based assets.
