Brian's Reviews > Restoring Financial Stability: How to Repair a Failed System

Restoring Financial Stability by Viral V. Acharya
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's review
Mar 16, 11

Read in December, 2010

Very interesting topics, treatment not for everyone

For various reasons, it took me a while to finish this one. The recent financial crisis is still a big interest of mine, and this is the first I've read from the perspective of ways to improve the financial system from what we've learned in the last two years. I'm sure much will be written in the decade to come, but these papers from NYU Stern faculty are among the first I've seen to come out. For that I give them credit. I do like many of the recommendations they present, though I kind of wish there were an executive summary tying it all together. In its current form, it's not something I'd recommend to everyone interested in the topic--hence the mediocre rating.

A quick rundown of some of the topics/opinions:

centralized clearing for derivatives:

where possible, standardize contracts and trade on exchanges
at least require registry of transactions and positions for better counterparty risk transparency

ratings agencies and conflict of interest: have investors pay, not the issuers
accounting: be more strict about when to allow "mark-to-model" accounting (also centralized clearing for derivatives)
executive and high-powered employee compensation: align with reducing systemic risk, and with long-term success of company
deal with existing homeowners who are underwater: encourage renegotiating loans and have borrower/lender split the capital gains (but ignores completely the fractured ownership due to securitization and how to motivate loan servicers)
price guarantees (e.g. FDIC, implicit lender-of-last-resort) for financial institutions according to systemic risk (size and riskiness of positions)
international cooperation: need to coordinate regulation of too-big-to-fail institutions (the suggestions above) to avoid international regulation arbitrage

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