Yes, America can regulate its banks
I've called capital requirements the "killer app" for financial regulation, but there's some question as to whether we can run the program. Some think that the international character of the financial market means that an international body -- probably the Basel Committee -- needs to make the call. That's been one of the explanations for the Dodd bill's vague language on capital requirements: There's no sense moving before Basel moves. But if that's true, then the importance of the FinReg proposals in Congress diminishes considerably. Someone else is making the most relevant decisions.
But conversations with financial experts over the past few days have convinced me that capital requirements can indeed be done domestically. "Nothing prevents the United States government from saying that if you want to operate in the country, your leverage needs to be at such-and-such levels," says Luigi Zingales, a professor of finance and entrepreneurship at Chicago University's Booth School of Business. "U.S. banks won’t be thrilled. And it's possible you’ll put companies at a comparative disadvantage. But you can do it."
Richard Carnell, a former assistant secretary for financial institutions at Treasury, is even more blunt. "That's self-serving nonsense," he says. "It's another way of deflecting accountability. So the regulators go into a back room at Basel and come up with something. Then when criticized, they say we’ll work to improve this, but they don’t have to take full responsibility." In fact, this Bloomberg article suggests that American regulators and banks don't always follow Basel regulations anyway, so it's hard to see that committee as a plausible final authority.
Insofar as there's a downside to setting your capital requirements domestically, it's that you might put your banks at a disadvantage if your regime is a lot stricter than everyone else's. Given the nature of our politics, that's probably not a very likely outcome. So we're back to arguing about the best way to regulate capital requirements, not whether it's possible for us to do so.
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