Banks are inherently opaque -- in many cases their own management doesn't understand their own balance sheet.
One of the great changes over the past few decades has been the migration of investment banks from partnerships to public equity structures. When an investment bank was a partnership, its "shareholders" were bankers and former bankers, with a deep understanding of the assets and liabilities _and_ of the ways in which management could manipulate their accounting. Those owners were highly incentivized to make sure the bank was properly run, as much of their wealth was tied up in that equity, which was in an illiquid form that couldn't easily be sold or hedged.
The commercial banks were always public equity, but until a few decades ago generally took considerably less risk.
Investment bank managements have since discovered that the public markets were willing to provide plenty of capital, with much less rigorous and careful oversight. So they've migrated those partnership structures to public equity, which enables much larger and riskier balance sheets.
If we were seriously interested in regulating these institutions, we'd require them to be partnerships in the old form. Nothing unconstitutional about it, the Fed could make such structure a requirement for access to its desk. Yes, we'd have much smaller banks, and less liquid markets, but their self-regulation would be far better.
Banks are inherently opaque -- in many cases their own management doesn't understand their own balance sheet.
One of the great changes over the past few decades has been the migration of investment banks from partnerships to public equity structures. When an investment bank was a partnership, its "shareholders" were bankers and former bankers, with a deep understanding of the assets and liabilities _and_ of the ways in which management could manipulate their accounting. Those owners were highly incentivized to make sure the bank was properly run, as much of their wealth was tied up in that equity, which was in an illiquid form that couldn't easily be sold or hedged.
The commercial banks were always public equity, but until a few decades ago generally took considerably less risk.
Investment bank managements have since discovered that the public markets were willing to provide plenty of capital, with much less rigorous and careful oversight. So they've migrated those partnership structures to public equity, which enables much larger and riskier balance sheets.
If we were seriously interested in regulating these institutions, we'd require them to be partnerships in the old form. Nothing unconstitutional about it, the Fed could make such structure a requirement for access to its desk. Yes, we'd have much smaller banks, and less liquid markets, but their self-regulation would be far better.