A group of prominent former financial regulators called on Congress to examine the stability of the financial system following questions raised by the GameStop episode.
A letter sent Wednesday by the Systemic Risk Council to the heads of Senate and House committees with market oversight said that in addition to reviewing the "extraordinary equity market volatility" caused by GameStop trading, Congress should examine whether four financial stability-related issues are being properly addressed by Washington:
- Whether the clearing house's collateral practices were adequate.
- Whether capital requirements for broker dealers are high enough.
- Whether re-hypothecation of collateral should be banned or constrained.
- Whether financial authorities could have done more to prevent feverish levered trading fueled by sustained monetary measures to support economic recovery.
SRC Chairman Sir Paul Tucker, the former deputy governor of the Bank of England, said in a statement that "while the recent equity market kerfuffle was not a direct threat to stability, the authorities must energetically learn from an ugly episode involving a scramble for collateral, to close out positions and to cut off services. Congress should ensure the unfinished business of rebuilding the financial system's resilience resumes."
The letter noted that for more than a decade, "economic recovery has relied upon extraordinarily easy monetary conditions," and said that financial regulators should have explored possible steps to constrain excessive leverage.
"It would be sensible and useful for legislators to ask why not. The West cannot afford another financial crisis, and yet, if only by default, leveraged exuberance seems to have gained hold again," it said.
The Systemic Risk Council is funded by the CFA Institute and many of its members were regulators during the global financial crisis.
