With scandals unfolding, consumer confidence at an all-time low and industries being lit up, trust in the financial system has crumbled and experts are trying to figure out a way to redesign it to give exchange traded funds (ETFs) that mimic the sector a much-needed boost.
A group of very well-known and trusted economic advisers, lead by former Federal Reserve Chairman Paul Volcker, recommends the following steps to restructure the weak financial system, states The Economist. Among their ideas?
- Imposing strict capital requirement restrictions on banks, especially on high-risk proprietary activities – this will force investment banks to focus on client services and not so much on trading, leading to the separation of commercial and investment banks
- Raising the level at which banks are considered to be well-capitalized
- Hedge funds that have pools of private capital that live on borrowed money should have to register with a regulator and provide full transparency
- Bank-like regulation for money market funds, giving assurance of a stable net-asset value
- Set up a mechanism for dealing with non-bank failures and a more refined analysis of liquidity in stressed markets and more robust contingency planning
- Central banks need to have a more vital role in policing such things, need to be vigilant during times when credit is expanding and be more involved in supervising bank safety and soundness
- A formal system of regulation for over-the-counter derivatives
- Urge regulators to force banks to hold on to a significant portion of credit risk when they package loans into securities and sell them on as well as more flexibility in the guidelines for loan-loss reserves
- Rethink certain accounting policies and procedures, like mark-to-market
- Enforcement and rule-making should be in harmony around the globe; after all this is a global crisis
Some ETFs to take a look at that could be influenced if the Obama administration practices what Volcker and his team preaches are the following:
iShares S&P Global Financials Sector Index Fund (IXG): down 17.4% in the last month
PowerShares Dynamic Banking Portfolio (PJB): down 12.8% in the last month
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.