Table Of ContentThe Squam Lake Report
The Squam Lake Group is 15 academics who have come together
to offer guidance on the reform of financial regulation.
Our group first convened in the fall of 2008, amid the deepening
capital markets crisis. Although informed by this crisis—its events
and the ongoing policy responses—the group is intentionally
focused on longer-term issues. We aspire to help guide reform of
capital markets—their structure, function, and regulation. We base
this guidance on the group’s collective academic, private sector, and
public policy experience.
Kenneth R. French Raghuram G. Rajan
Dartmouth College University of Chicago
Martin N. Baily David S. Scharfstein
Brookings Institution Harvard University
John Y. Campbell Robert J. Shiller
Harvard University Yale University
John H. Cochrane Hyun Song Shin
University of Chicago Princeton University
Douglas W. Diamond Matthew J. Slaughter
University of Chicago Dartmouth College
Darrell Duffie Jeremy C. Stein
Stanford University Harvard University
Anil K Kashyap René M. Stulz
University of Chicago Ohio State University
Frederic S. Mishkin
Columbia University
The Squam Lake Report
Fixing the Financial System
Kenneth R. French, Martin N. Baily, John Y. Campbell,
John H. Cochrane, Douglas W. Diamond, Darrell Duffie,
Anil K Kashyap, Frederic S. Mishkin, Raghuram G. Rajan,
David S. Scharfstein, Robert J. Shiller, Hyun Song Shin,
Matthew J. Slaughter, Jeremy C. Stein, René M. Stulz
PRINCETON UNIVERSITY PRESS
PRINCETON AND OXFORD
Copyright © 2010 Princeton University Press
Published by Princeton University Press, 41 William Street,
Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press, 6 Oxford Street,
Woodstock, Oxfordshire OX20 1TW
press.princeton.edu
All Rights Reserved
Library of Congress Cataloging-in-Publication Data
The Squam Lake report : fixing the financial system / Kenneth R.
French . . . [et al.].
p. cm.
Includes index.
ISBN 978-0-691-14884-7 (hbk. : alk. paper) 1. Financial crises—
Prevention. 2. Finance—Government policy. 3. Capital market—
Government policy. I. French, Kenneth R.
HB3722.S79 2010
332.1—dc22
2010009897
British Library Cataloging-in-Publication Data is available
This book has been composed in ITC Garamond Std
Printed on acid-free paper. ∞
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Contents
Preface vii
Acknowledgments xi
CHAPTER 1: Introduction 1
CHAPTER 2: A Systemic Regulator for Financial
Markets 33
CHAPTER 3: A New Information Infrastructure for
Financial Markets 44
CHAPTER 4: Regulation of Retirement Savings 53
CHAPTER 5: Reforming Capital Requirements 67
CHAPTER 6: Regulation of Executive Compensation
in Financial Services 75
CHAPTER 7: An Expedited Mechanism to
Recapitalize Distressed Financial
Firms: Regulatory Hybrid Securities 86
CHAPTER 8: Improving Resolution Options for
Systemically Important Financial
Institutions 95
CHAPTER 9: Credit Default Swaps, Clearinghouses,
and Exchanges 109
vi • CONTENTS
CHAPTER 10: Prime Brokers, Derivatives Dealers,
and Runs 122
CHAPTER 11: Conclusions 135
List of Contributors 153
Index 157
Preface
The Squam Lake Group is 15 leading financial economists
who came together to offer guidance on the reform of fi-
nancial regulation. The group first met for a weekend in the
fall of 2008 at a remote and scenic retreat on New Hamp-
shire’s Squam Lake. The World Financial Crisis was then at
its peak. Although informed by this crisis—its events and
the ongoing policy responses—the group has intentionally
focused on longer-term issues. We have aspired to help
guide the evolving reform of capital markets—their struc-
ture, function, and regulation.
This guidance is based on our collective academic, pri-
vate sector, and public policy experience. Members include
eight of the nine most recent presidents of the American
Finance Association (including the current president and
the president-elect), a former Federal Reserve Governor, a
former Chief Economist of the International Monetary Fund,
and former members of the Council of Economic Advisers
under President Bill Clinton and President George W. Bush.
The group has been united and motivated by a common
concern: that policymakers often misunderstand or ignore
the large body of academic knowledge that could guide
sound regulatory reform, resulting in poorly designed poli-
cies with unintended consequences.
viii • PREFACE
After the initial Squam Lake meeting, the group worked
to develop specific proposals targeted at policymakers
around the world. We collaborated through emails, phone
calls, and meetings. The breadth of expertise in the group
led to many interesting and sometimes spirited discussions.
But all members of the group came to agree on a growing
list of urgent and important recommendations. Through-
out, the group has been staunchly nonpartisan, with no
business or political sponsor.
As agreement was reached on a topic, we crafted a white
paper summarizing our analysis and recommendations, and
then worked to have it inform policy conversations in real
time. Members of the group have been actively engaged in
the policy process at the highest level around the world. In
the United States, members have briefed Democratic and
Republican Senators and Representatives and testified be-
fore both chambers of Congress. We have consulted with
officials at the Federal Reserve Board, the Federal Reserve
Bank of New York, the Treasury Department, the Coun-
cil of Economic Advisers, the European Central Bank, the
Bank for International Settlement, and the Securities and
Exchange Commission, and with the President of Korea.
Members of the group have also made presentations at the
Bank of England, Her Majesty’s Treasury, the Banque de
France, and the European Commission, and we have had
meetings with individual policymakers from many other
countries.
This book collects and briefly explains the group’s pol-
icy recommendations. The introduction highlights features
of the World Financial Crisis that shaped our recommenda-
PREFACE • ix
tions and previews connections among all of them. Sub-
sequent chapters present our proposals on specific issues.
The concluding chapter describes two key principles that
summarize our proposals and explores how these propos-
als would have mitigated the World Financial Crisis. Finally,
we discuss some challenges that may impede the adoption
of our proposals.
Description:In the fall of 2008, fifteen of the world's leading economists--representing the broadest spectrum of economic opinion--gathered at New Hampshire's Squam Lake. Their goal: the mapping of a long-term plan for financial regulation reform.The Squam Lake Report distills the wealth of insights from the o
