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Finance Professor Viral Acharya Testifies Before the House Financial Services Committee
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On May 6, 2010, Viral Acharya, Professor of Finance, testified before the US House Financial Services Committee at a hearing on "The End of Excess (Part One): Reversing Our Addiction to Debt and Leverage."
Drawing on his extensive research on leverage in the financial sector and systemic risk, Acharya explained that:
Acharya then focused on regulatory options with respect to leverage and suggested that
Read Prof. Acharya’s written testimony
Watch Prof. Acharya’s testimony
Drawing on his extensive research on leverage in the financial sector and systemic risk, Acharya explained that:
- On a regular basis, financial intermediaries are over-extending credit and are funded with excess leverage. In a down economy, this requires government intervention to guarantee funds making it easier for banks to borrow without significant risk to their balance sheet.
- There were three primary reasons why there was an escalation of leverage: 1. access to government guarantees that were not paid for, especially for the commercial banks and government-sponsored enterprises; 2. ineffective enforcement that allowed bank regulation to be arbitraged, that is, circumvented, by a sophisticated financial sector; and, 3. in case of investment banks and the insurance sector, simply poor design of regulation.
- A great deal of leverage was undertaken in the shadow banking system.
Acharya then focused on regulatory options with respect to leverage and suggested that
- A tax on, or a maximum level of, leverage be imposed
- A regulatory structure for the shadow banking system similar to that of the on-balance sheet regulation of financial firms
- Reformation of government sponsored entities
Read Prof. Acharya’s written testimony
Watch Prof. Acharya’s testimony