The Kanjorski Surprise – Financial Reform Gets Interesting

– Federal regulators have the power to limit the activities or even break up big banks if they pose a “grave risk” to the financial system –

By Simon Johnson in the Baseline Scenario

The bank lobbyists, it turns out, missed one.  They and their congressional allies were able to gut the Volcker Rule, the Lincoln Amendment, and almost everything else that could have had a meaningful effect on the industry.

But, as I point out in a Bloomberg column today, they couldn’t get at (or didn’t sufficiently understand?) the Kanjorski Amendment.  This Amendment was originally proposed by Congressman Paul Kanjorski (chair of an important House subcommittee on capital markets) during the fall.  Against the odds, it survived in the final House bill and now – probably because it has stayed mostly below the radar – remains in the reconciled legislation.

Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a “grave risk” to the financial system.

The Federal Reserve is in the hot seat on this issue – and it needs 7 out of the 10 members of the new systemic risk council to agree to any action.  But for the first time someone at the federal level must make a determination regarding whether an individual firm poses system risk.

And congressional committees can call upon the responsible people to explain how they determine whether a megabank is or is not dangerous.  What are the risk metrics they use?  To what extent do they take on board outside opinions?  How much do they consult with the bank itself?

This also creates important space for critics.  There are many people – outside of the big banks – working on developing ways of assessing system risk.  Again, congressional hearings can raise the prominence and credibility of this work.  The question will be: If the regulators are not taking these perspectives into account, why not?

This may all sound rather technical, and to some extent it is.  But it is also intensely and pointedly political.  The Kanjorski Amendment makes it clear that system risk must be assessed and dealt with.  And it assigns clear responsibility for this issue – along with a cut and dried list of remedies.

The debate on big banks and the dangers they pose is far from over.