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Common criticisms of derivatives that emerged after the 2008 financial crisis are “far broader than the specific instruments or circumstances implicated”, Acting Comptroller of the Currency, John Walsh, said in remarks prepared for a conference in Las Vegas. The Office of the Comptroller of the Currency, which Walsh runs, supervises the large banks being forced to restructure their derivatives and trading operations as a result of the Dodd Frank law.
To critics, derivatives “are not just a sophisticated component of a bank’s product portfolio, but toxic instruments that should be pushed out of the banking system entirely”, Walsh said. “That is a vast overreaction, and it worries me that misperception could motivate redesign of the system … risk ascribed to derivatives is often many orders of magnitude greater than the reality.”
By contrast, Gary Gensler, chairman of the CFTC, has been far more critical. At a hearing last week, Gensler said derivatives, particularly credit default swaps, were central to the financial crisis and housing bubble. “They contributed to a system where large financial institutions were considered not only too big to fail, but too interconnected to fail”, Gensler said.
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