Wednesday, October 28, 2009

NYU b-school Dean Cooley on financial regulation

Must read column in Forbes on the future of financial regulation by Thomas Cooley, distinguished finance professor and dean of the Stern School of Business at NYU. Cooley first examines the question of whether commercial and investment banks should be re-separated a la Glass-Steagall. Although this would help on some dimensions, Cooley argues that it does not solve the central problem:

The real issue is that some institutions expose the entire financial system to risk by decisions taken within a single firm or business unit. That is what systemic risk is--it pollutes the financial commons. Making financial institutions smaller or simpler doesn't really address systemic risk. It may make it easier to identify, but it doesn't fix the problem.
For the past year, Cooley has been advocating the approach proposed by Ben Bernanke:

... they are discussing the "polluter pays" principle that I have been writing about for over a year as the way to think about systemic risk. On this view, the way to discourage the accumulation of systemic risk is to measure it, price it and make firms pay for creating it.

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