U.S. Risks ‘Vast Overreaction’ in Derivatives Rules, Walsh Says

The level of risk popularly assigned to the derivatives market is greatly exaggerated, said Acting Comptroller of the Currency John Walsh.

U.S. regulators risk a “vast overreaction” in their efforts to overhaul the global derivatives market, Walsh said in a speech prepared for a conference of the American Securitization Forum in Las Vegas today.

“Lack of understanding feeds misperception, and derivatives are not particularly well understood, even by some top policy makers,” he said.

While the notional value of derivatives contracts was $248 trillion at the end of September, U.S. commercial banks had $504 billion in net credit exposure to such contracts, about 0.2 percent of the notional values, Walsh said.

“I’m not trying to suggest that this isn’t a big market or that it doesn’t involve sizeable risks, but the risk ascribed to derivatives is often many orders of magnitude greater than the reality,” Walsh said in his prepared remarks.

“Warren Buffett colorfully labeled derivatives ‘financial instruments of mass destruction,’ and, for some, they 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, referring to the billionaire chairman of Berkshire Hathaway Inc. “That is a vast overreaction, and it worries me that misperception could motivate redesign of the system.”

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