Today's luncheon keynote was a vast improvement over yesterday's gross failure. The speaker was Sheila Bair, former FDIC Chairman. The welcome packet for the seminar included her book, Bull by the Horns. Her most interesting comments to me were:
1. The move in regulation toward using internal models to set capital limits (in banking and in insurance) is in her opinion a bad idea. It creates perverse incentives by penalizing firms with conservative models. Models are going to be biased low when regulators use them directly (and worse: unbiased models won't be produced at all.)
2. Regulators create more and more complexity, and the current path (Basel, etc.) is disastrous because of this. Incomprehensible regulations abound that no one can follow.
3. Valuing assets on a risk-adjusted basis for regulatory purposes has been a disaster. It creates perverse incentives to hold certain assets and report them in a certain way. As a solution, she proposes a return to a simple leverage ratio requirement temporarily until regulators have enough time to develop a better model for risk-valuation of assets.
Overall, it was an interesting talk. I look forward to reading her book.
End Lunch Keynote.
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