capital guidelines of the federal banking agencies, ” joint advance notice of proposed rulemaking ( august 10 ). still, it may require extension of g - m ’ s confidence that the regulator could adequately oversee abs ratings to confidence that it could assign ratings in the first place. i would observe that the substantial effort expended by staff at the board and the federal reserve bank of new york to evaluate the creditworthiness of a relatively small number of securitizations in the term asset - backed securities loan facility suggests the enormity of that task. furthermore, the wisdom of having a government agency – even the independent central bank – assume such a permanent, central role in credit allocation should at least be subject to debate. a final regulatory issue is raised by another g - m response to their expectation that equity returns for nfbs will be lower than for traditional banks. in place of the equity capital requirements generally applicable to banking organizations, g - m propose that nfbs would issue capital notes that are debt - like except in periods of stress, when they would convert to equity. in essence, all of an nfb ’ s capital would be contingent capital. while contingent capital is an item on the financial regulatory agenda, it is considered a possible supplement to common equity, not a substitute for it. in this respect, the g - m proposal moves in the opposite direction from basel iii, which has followed markets in making common equity the centerpiece of capital evaluation and requirements. 5 these inconsistencies with current law and practice in the g - m proposal do not themselves argue against its soundness. they do, however, underscore the degree to which the nfbs would require development of a new financial regulatory approach, as well as a restructuring of the abs and repo markets. more generally, the existence of costs or problems does not counsel the rejection of the proposal as such. in the face of very real flaws in the pre - crisis state of these markets, and the failure of some abs markets to recover, even where it seems they could function sensibly, there is a very good case for a policy initiative. so let me consider briefly whether variants on the basic g - m approach might retain its core benefits while addressing some of its potential problems. one possibility would be to broaden the permissible ownership of nfbs to include bank holding companies. this modification would make the most sense if one believed that the basic g - m approach was promising but

, with careful specification of the benefits of the repo market that g - m are trying to save, weighed against the likely impact on – among other things – the securitization market and regulatory system. a second set of questions concerns how the nfbs would operate in practice. as a threshold matter, it is worth noting that policymakers may find the proposal to have a certain binary for a survey of the entire shadow banking system, see pozsar, zoltan, tobian adrian, adam ashcraft, and hayley boesky ( july 2010 ) : “ shadow banking, ” ( 928 kb pdf ) federal reserve bank of new york staff reports, no. 458. quality. that is, it would structurally change the entire securitization market and a large portion of the repo market essentially overnight. in effect, g - m put all securitization eggs into one basket. if the new system worked well, the benefits presumably would be significant, and perhaps quickly realized. indeed, the new system might succeed in helping to restart, on a sounder basis, various abs submarkets that remain largely dormant three years after the crisis began to unfold. 3 if, on the other hand, the new system encountered major difficulties, there might be materially reduced adaptive capacity in other financial actors, possibly for a considerable period. one obvious source of difficulty is the possibility, well recognized by g - m, that the business model mandated for nfbs might not be viable and stable. as with all forms of narrow banks proposed over the years, nfbs as a group would seem likely to generate relatively low revenues, given the low risk of the securities in which they would have to invest. g - m propose to counter this problem by granting franchise value through the statutory monopoly on securitization mentioned earlier and through access to the federal reserve ’ s discount window. picking up on their analogy to the creation of deposit insurance in the 1930s, the monopoly on securitization is intended to help offset the regulatory costs imposed on nfbs in the same way that the monopoly on the “ business of banking ” was intended to offset the regulatory costs imposed on insured depository institutions. unlike the business environment for banks in the 1930s, however, securitization and repo lending are national – if not international – activities, with little to suggest that any advantage would be derived from local knowledge. it seems quite possible that the economies