Paul Volker, an 85 year old former Chairman of the Fed was heavily involved in w
ID: 2682157 • Letter: P
Question
Paul Volker, an 85 year old former Chairman of the Fed was heavily involved in writing portions of the Dobb-Frank Financial Reform legislation, especially those parts that had to do with the capital reserve requirements of commercial banks. Before the legislation went into effect these capitals reserve accounts had to be in the neighborhood of 2 to 3% of assets. The so-called Volker Rule, as it was known in banking circles was to be set at about 10%. The final legislation was passed at 5%. Please discuss the role of bank capital in risk management and the pros and cons of having higher then lower capital requirements.Explanation / Answer
The strong presence of banks that are parts of (much) larger international banking groups brings both benefits and risks to the country . On the benefit side, it has enhanced risk-management capacity within the banking system, facilitated the entry of new banking products and services, and provided a source of financial strength to weather domestic economic shocks. Against these bene?ts are increased exposure to adverse events or mismanagement in the parent banking systems, which is accentuated by the high industry concentration and the dominant position of banks from a single foreign country.