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Dodd-Frank is weak on repo

Banking reporter Peter Eavis at the Wall Street Journal is wondering why the Dodd-Frank Act didn’t do more to limit banks’ use of short-term debt like repurchase agreements.

From his September 7 comments at Heard on the Street:

While the repo market is smaller and stronger today, and Lehman had unique weaknesses, the details emerging from the crisis show the risks created by heavy reliance on short-term debt to juice returns. To help save other banks, the government had to introduce a debt-guarantee program at the end of 2008.

Yet Dodd-Frank is weak on this issue. It says regulators can demand limitations on a financial firm’s short-term debt but doesn’t specify ceilings. Instead of setting up ways to impose haircuts on a bank’s secured creditors if necessary in a wind-down, which would inject more market discipline, the legislation merely sets up a study on this subject. What is more, it establishes procedures for the government to widely guarantee bank debt again.

If the financial crisis were written up as a Victorian novel, overuse of short-term debt would be the problem no one wants to properly discuss.

But the ugly details of the Lehman debacle are making it harder and harder to avoid.

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