PARTICIPANTS
Monika Piazzesi, Pablo Kurlat, Derek Kan, Chad Jones, Andrew Crockett, Ken Scott, Bob Hall, Martin Schneider, Jacob Goldfield, Jeremy Bulow, George Shultz, Michael Boskin, Johannes Stroebel
ISSUES DISCUSSED
Viral Acharya, Finance Professor at NYU Stern, outlined his conclusions on the efficacy of the Dodd-Frank Act, recently summarized in “Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance.” Acharya began by describing the importance of managing two key forces in dealing with failing financial institutions: On the one hand, it is important to bring back market discipline and reduce moral hazard by forcing creditors to take losses on risky positions. On the other hand, it is important to contain any systemic fallout that can arise when you force creditors (in particular other systemically important institutions) to take losses.
Acharya discussed two primary weaknesses with the current set-up of Dodd-Frank. Firstly, the bill is focused on managing the orderly liquidation of individual failing institutions, without addressing in sufficient detail the impact that such liquidations may have on other systemically important parties in the system. Secondly, the financing of the Orderly Liquidation Fund is suboptimal: If a systemically important financial institution (SIFI) fails, and monies cannot be recovered from creditors, the surviving SIFIs must make up the difference ex post. This creates moral hazard, because it allows firms to free-ride. Instead, Acharya argued, there is the need to set up an ex ante Orderly Liquidation Fund.
Acharya also addressed two other aspects of the Dodd-Frank act: The restriction of the Fed’s 13(3) ability to extend discount-window lending to non-banks unless a system-wide crisis emerges, and the question of whether FDIC-like receivership is the correct solution to dealing with failing SIFIs. Acharya also introduced the group to NYU Stern’s Systemic Risk Ranking, which attempts to classify different financial institutions on a number of key risk criteria.
