Barney Frank Responds to Systemic Risk Criticisms.

In an interview a few minutes ago, House Financial Services Committee Chair Barney Frank responded to criticism of the systemic risk legislation, proposed by the administration, that he is moving through Congress. During a hearing yesterday, several members of Congress, along with regulators like FDIC Chair Sheila Bair, expressed concern about the proposal for dissolving failed banks, which relies on an after-the-fact fee on the rest of the financial system. Bair and Rep. Luis Gutierrez argued that an insurance fund, assessed in advance of a crisis, would be a fairer and more predictable way to prevent the costs of bank failures from falling on consumers. Frank said today that he is now supporting such a provision, saying that:

"The administration felt that it was a mistake to have a fund up front, because that might make [people] think that there was moral hazard, but people are going to think that anyway, so we are going to change it so that there is an up-front fund to be paid for by assessments on these institutions."

He made the decision after listening to the various views expressed at the hearing. Democracy at work!

-- Tim Fernholz