While watching Too Big to Fail last night on HBO I was reminded of an article I read last week titled “Clearing Houses ‘Would Not Have Prevented Financial Crisis’”. Basically, the article’s point was that while there have been efforts made since the financial crisis to prevent future ordeals there hasn’t been enough focus on taking away the threat of “too big to fail”. Meaning that even with all the work being done on CCPs and Dodd-Frank there could still be future meltdowns within the industry if big institutions don’t look into making themselves fail proof. In other words, one area of these large corporations needs to be able to fail without disrupting the entire institution.
This, to me, makes sense. But then why is this not a bigger issue? The main focus has obviously been on Dodd-Frank. In the article I mentioned on clearing houses, John Hull, the Maple Financial Professor in derivatives and risk management at the University of Toronto, stated “Supposing Dodd-Frank was in place five years ago, and around 70% of OTC derivatives went through CCPs, I don’t think it would have made a whole lot of difference.” So basically he’s implying that even with all the new rules and regulations being enforced the crisis might still have occurred.
So, is all this regulation and change actually going to prevent another financial crisis? Or are all of these endeavors to prevent a future meltdown for nothing? Hull went on to say, “The next crisis may well be caused by instruments that haven’t been made yet. I understand that regulators want to create more transparency in this market, but I don’t see CCPs as being a major thing towards preventing the next crisis.”
Could it be possible that regulators are just busying themselves for no reason? In an industry that is always evolving due to technology and economic change, is there really a way to prevent another financial disaster? I think the main lesson from this past crisis is that the government/regulatory bodies and major institutions need to act sooner. When you see a problem do something about it up front, don’t let it get away from you. Even small issues can become big problems!