To incorporate fiscal stability through the highest act in the country, the constitution. V. As usual, the establishment of a new action framework is one thing, while whether this framework will become operational, functional, and to what extent, is another thing. It is obvious that the bunch of new ideas, new tools we talk about forced by the crisis, are focused on establishing a concept for managing systemic risk. Therefore, the questions whether it will function, on what the result depends most, are logical. 1) First, the systemic risk is not too hard to define. It is harder to provide operative contents, because of its different dimensions: procyclicality; contagion risk; the spillover effects of a single institution’s distress to the rest of the financial system; correlation risk; concentration risk; then, due to the fact that the risk can originate from several sources, etc. 2) Even when the source is identified, the history shows that there is no action at all, or the action is delayed, or the seriousness of the threat is underestimated. For example, the false reports of the Greek government for the real fiscal deficits were not unknown. And not only for theirs. It is not untrue that the Federal Reserve and the Treasury have proposed to the Congress a gradual reduction or possible extinction of the GSEs portfolio (Fannie Mac и Freddy Mac), quite before 2004 when their assets were several times smaller than US Dollar 3.2 trillion at the end of 2007.
(Carosio) Although it is possible, he says, to reach an agreement on some of these proposals, in particular on resolution mechanisms, others (e.g. breaking up institutions according to some criterion) would require a broad international political consensus, which seems unlikely at this stage. The second approach would be directed toward seeking additional capital requirement, or a tax, according to the measure for systemic relevance. Taxation seems, according to Carosio, more adequate in a burden-sharing perspective. “The solution, in my judgment”, says Greenspan “that has at least a reasonable chance of reversing the extraordinarily large ‘moral hazard’ that has arisen over the past year is to require banks and possibly all financial intermediaries to hold contingent capital bonds, that is, debt which is automatically converted to equity when equity capital falls below a certain threshold”. “However, should contingent capital bonds prove insufficient, we should allow large institutions to fail, and if assessed by regulators as too interconnected to liquidate quickly, be taken into a special bankruptcy facility”. So, he supports the second approach, and in that light is the latest legislation in the USA which is about to be adopted, as well as the proposals in Europe which envisage measures of this kind. Namely, “Restoring American Financial Stability Act”, which was passed in the US Senate on May 20, would impose significant new obligations and restrictions for the SIFIs, envisaging a possibility for the FED to introduce rising strict rules for capital, leverage and liquidity.