The solution is close to hand and it does not involve regulation--at least the kind that regulators want. The solution is transparency. Just make all the big banks report their actual transaction on a live feed. This simple solution would have been infeasible even 20 years ago, but not any more.
The implications would be enormous. No more need for accounting reports, indexes or anything else that requires a judgement call by a corruptible human. The job of watching the banks would pass from the power hungry (or worse, sleepy) regulators to the public (you and me).
Once upon a time I performed the risk mgmt. function for a portion of a large bank. We used a couple of servers running every night to track a few thousand positions. The system knew every detail of about 95% of the positions. Today a team of 50 could track the entire banking system--given the right feed. Make the same information I used public and open to competing teams of analysts and then risk becomes a known quantity.
Of course, banks and regulators would be strongly opposed to this approach. They will howl about privacy, proprietary information etc. But the fact is when you ask a bank for a loan, they know all of your relevant financial information in order to judge your risk. It's only fair for the taxpayers to turn the tables and end our old-fashioned and broken system of disclosure. And if the risky part of banking is driven into a part of the industry that doesn't share information, then their investors should do without a safety net.
It certainly would if only one bank did it. However such a rule would have to be evenly applied. My belief is that this would drive down volatility in markets since it would end the game of "Old Maid" in a crisis. Depending on how many institutions were under this rule, trading volumes may decrease, although I could argue this the other way as well.
The implications would be enormous. No more need for accounting reports, indexes or anything else that requires a judgement call by a corruptible human. The job of watching the banks would pass from the power hungry (or worse, sleepy) regulators to the public (you and me).
Once upon a time I performed the risk mgmt. function for a portion of a large bank. We used a couple of servers running every night to track a few thousand positions. The system knew every detail of about 95% of the positions. Today a team of 50 could track the entire banking system--given the right feed. Make the same information I used public and open to competing teams of analysts and then risk becomes a known quantity.
Of course, banks and regulators would be strongly opposed to this approach. They will howl about privacy, proprietary information etc. But the fact is when you ask a bank for a loan, they know all of your relevant financial information in order to judge your risk. It's only fair for the taxpayers to turn the tables and end our old-fashioned and broken system of disclosure. And if the risky part of banking is driven into a part of the industry that doesn't share information, then their investors should do without a safety net.