CNN en Español interviewed CGD senior fellow Liliana Rojas-Suarez on the recently approved U.S. financial reform and its potential to prevent a future crisis that has the same characteristics as the one the U.S. just had.
Rojas-Suarez started by mentioning that this new reform is one step in the right direction, but that does not mean it will prevent future crises. She said that it is more a matter of implementing the regulations rather than simply having them.
For her, the recently signed piece of legislation is just the beginning - there are more specific rules that are still waiting to be approved. One example of these rules is the limit on the fees charged when a person withdraws money from an ATM.
She expressed concern that a big system of financial supervision might take away efficiency in the financial sector since it becomes more complex. However, this regulation wants to attack the problem of interconnection among institutions and thus makes the system more complex. On the other hand, they want more transparency and they choose simplicity. In spite of all this, the approval of this regulation is -- politically speaking -- a victory.
Regarding the Volcker rule, Rojas-Suarez said that it wasn’t completely approved since the rule proposed to prohibit firms from using their own capital in risky investments or hedge funds. What was approved is that firms are allowed to use at most 3% of their capital on this kind of investment. She said that the effectiveness of this rule has now been limited since most of the banks use less than 3% on these investments.
When comparing the US and Europe regulations, she mentioned that both of them depend on international regulations that are still to be determined, especially when it comes to capital requirements. In this case, both regulations will be adjusted according to what Basel III says. The proposal of Basel III will be discussed during the fall.
Finally, she spoke regarding the money used for Fannie Mae and Freddie Mac. These institutions weren’t part of the discussion of this new regulation. Nevertheless, Rojas-Suarez said a new discussion about them will begin soon. The plan is not to eliminate but to downsize them. She highlighted that the US government thinks that a public institution is necessary for the mortgage market that generates liquidity for the system.