Finance Professor Viral Acharya Testifies Before the House Financial Services Committee

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:

• 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 oral testimony
Read Prof. Acharya’s written testimony
Watch Prof. Acharya’s testimony