April 14, 2015
Federal Deposit Insurance Corporation
550 Seventeenth Street NW
Washington DC 20429
Attention: Chairman Thomas Hoenig
RE: Effective and Simplified Regulation for a Simplified Bank
Dear Chairman Thomas Hoenig,
In the article published by American Banker Want Simpler Regulation? Try simplifying your bank first, you call for simplification, transparency and timely reporting. The attached letter to Senator Elizabeth Warren calls for the creation of an entity which is consistent with such simplicity and transparency: The Fully Transparent Broker-Dealer.
The Fully Transparent Broker-Dealer:
Electronically disseminates all data but personally identifiable information to the regulator.
Allows for independent customer reserve and net capital computations.
Does not engage in derivatives trading for customer or firm accounts
Allows the systemic risk regulator to block risk based trades in real time.
In an ideal structure of systemic risk regulation, there is no need for FDIC or SIPC insurance because the systemic risk regulator receives reporting for customer segregation of assets and solvency in real-time, and has the means to insure that customer will receive one-hundred per-cent of their assets before the entity goes into bankruptcy. The entity should not go into bankruptcy as the systemic risk regulator has the means to block risk based transactions at the time of execution.
A broker-dealer such as Fidelity effectively manages risk on a million margin accounts by daily vigilance of customer trades. If Firm Net Capital is calculated monthly then it can be calculated daily. If the haircuts of portfolio margin accounts can be done intraday per SEC requirements, then the same can be applied to firm equity on a daily basis. If the margin department of a broker-dealer can monitor and close out the positions of thousands of margin accounts of the broker dealer then it can be done for a firm account. If a young woman in the margin department can work remotely from home to monitor margin, then remote access can be granted to a systemic risk regulator in Washington DC.
Though the article may have been directed at the large institution which may be considered too big to fail, many smaller institutions have taken substantive steps to eliminate risk from their balance sheet. One such smaller bank which was validated as not systemically important as they were rejected for TARP should be interested in setting up for the Fully Transparent model on a pilot program. Their customers and investors should take comfort as there is nothing to hide.
Saint John on Transparency: Everyone who does evil hates the light, and will not come into the light for fear that their deeds will be exposed. But whoever lives by the truth comes into the light, so that it may be seen plainly that what they have done has been done in the sight of God. (John 3 20-21)3
The simple solution to “too big to fail”is to offer customers an attractive incentive for shifting their assets to a safe haven insulated from the derivatives markets. Protection of customer assets is realized not by ring fencing the contagion of each and every insolvent bank or country but to draw assets to an formidable fortress ring-fenced from derivatives toxicity: The Fully Transparent Broker-Dealer. If it can be done for one simple trading account, a scalable model can be built for any entity willing to be simple and fully transparent.
The presence of FDIC insurance for all banks only attracts assets in banks such as JPM Chase knee deep in derivatives risk. Too big to fail banks should not be insured at all unless they shed derivatives trading. Conversely the bank or broker-dealer which is deemed pure and fully transparent, should allowed for greater insurance coverage for their customers as there are formidable means of protection of assets. Consequently, the FDIC by creating incentives for transparency is in a unique position to play a decisive role in resolving the too big to fail.
I hope you take this letter seriously and respond soon with support for the Fully Transparent Broker-Dealer pilot program. We at The Fully Transparent Broker-Dealer are as congenial, humble and simple as a Motel 6, and to prove it I will leave you like Tom Bodett of Motel 6 and say “we will leave the light on for you”