The Year's Top Reads on Financial Regulatory Reform

As we come to the end of the year, we dug up the items from our What We’re Reading blog posts that were the most popular in 2014. Below were some of the articles which you found the most interesting. We hope that you enjoy this recap and wish you a Happy New Year.

As always, the views expressed in these articles do not necessarily represent the views of the initiative, its co-chairs, task force members or the Bipartisan Policy Center.

Compiled by Aaron Klein, Peter Ryan and Justin Schardin. 

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In July, the Government Accountability Office (GAO) released a much anticipated report on the cost of funding advantage for large banks. The report and letter from the Treasury Department were our top two mostly widely read items of the year:

“Large Bank Holding Companies: Expectations of Government Support”
By the GAO

“All 42 models found that larger bank holding companies had lower bond funding costs than smaller ones in 2008 and 2009, while more than half of the models found that larger bank holding companies had higher bond funding costs than smaller ones in 2011 through 2013, given the average level of credit risk each year.” Read the report here.

Letter from the Department of the Treasury to the Government Accountability Office
By Mary J. Miller, Under Secretary for Domestic Finance, U.S. Department of the Treasury

“?[T]the results of  GAO’s analysis are noteworthy: While large bank holding companies had clear funding costs advantages during the 2007-2009 financial crisis, these advantages had declined or reversed by 2013. ? We believe that these results reflect increased market recognition of what should now be evident ? Dodd-Frank ended ?too-big-to-fail’ as a matter of law.” Read the letter (in the appendix of the GAO report) here.

BPC released a report in October, The Big Bank Theory: Breaking Down the Breakup Arguments,  that examined the arguments for and against breaking up large financial institutions, including an overview of the cost of funding topic.

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The emergence of virtual currencies was popular in 2014 as well.

“Virtual Currencies: Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges”
By the GAO

 “Bitcoin and other virtual currencies are technological innovations that provide users with certain benefits but also pose a number of risks. ? For example, recent events suggest that consumer protection is an emerging risk, as by the loss or theft of bitcoins from exchanges and virtual wallet providers and consumer warnings issued by nonfederal and non-U.S. entities. However, federal interagency working groups addressing virtual currencies have thus far not emphasized consumer-protection issues, and participation by the federal government’s lead consumer financial protection agency, CFPB, has been limited.” Read the full report here.

BPC held an event on December 18 featuring a keynote address on Bitcoin regulation delivered by Benjamin Lawsky, Superintendent of the New York Department of Financial Services. The event, entitled Payments Policy in the 21st Century: The Promise of Innovation and the Challenge of Regulation, also featured a panel that discussed how new payment technologies will impact consumers, businesses and financial institutions.

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The Dodd-Frank Act turned four this year. To mark the event, BPC hosted an event on July 15 featuring former U.S. Senator Chris Dodd (D-CT) entitled Dodd-Frank at Four: Making Progress, Meeting Challenges, and Finding Solutions. At the event, BPC released a list of the top ten solutions that Congress and regulators could take to improve upon the Act.

The Republican and Democratic staff of the U.S. House Committee on Financial Services also released reports to coincide with the anniversary of the Act:

“Failing to End “Too Big to Fail:’ An Assessment of the Dodd-Frank Act Four Years Later”
By the Republican Staff of the Committee on Financial Services, U.S. House of Representatives

“The 2008 financial crisis presented Congress, the regulators, and the financial markets with an opportunity to break decisively with the past ? to do things better, to be smarter, to learn from our mistakes. But by resorting to the same failed strategies and misplaced confidence in the powers of regulation and regulators that led to the financial crisis in the first place, the Dodd-Frank Act squandered that opportunity. Instead, the Dodd-Frank Act further entrenched the problem of ?too big to fail’ by giving regulators even greater control over our financial system and a virtually unlimited pot of taxpayer money to bail out financial institutions when regulation inevitably fails.” Read the report here.

“The Fourth Anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010”
By the Democratic Staff of the Committee on Financial Services, U.S. House of Representatives

 “In the last four years, much has been accomplished, and Americans from across the political spectrum ? Democrats, Republicans, and Independents ? overwhelmingly support regulating the financial services industry and financial products to ensure that consumers and taxpayers are protected. ? However, this progress has been regularly stymied by a concerted effort by the Majority to underfund regulators’ operations, relentlessly pressure them to weaken regulations, and otherwise erect roadblocks to implementation. As a result, the progress regulators have made to implement the law remains precarious.” Read the report here.

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One of our most popular 2014 items was a 2009 speech by Federal Reserve Board Vice Chairman Stanley Fischer that remains timely today.

“Preparing for Future Crises.” Remarks to the Federal Reserve Bank of Kansas City
By Stanley Fischer, then-Governor, Bank of Israel and current Vice Chairman, Board of Governors of the Federal Reserve System

“The argument about macroprudential regulation is closely related to a topic that has been discussed repeatedly at these conferences ? how the central bank should respond to asset prices, and particularly to perceived asset price bubbles. This discussion has suffered from three distortions. First, if the issue is posed as that of how to burst a bubble when the only tool at the central bank’s disposal is its interest rate, it is all too easy to argue that nothing should be done until the bubble bursts. The more general issue is whether the interest rate should respond to asset prices and the financial situation more generally, and there is a strong argument that the answer is yes. Second, there is no reason to confine the central bank’s policy tools to the interest rate. Macroprudential tools can be added to its quiver. And third, the right question is not what the central bank should do, but rather what actions need to be taken by the authorities to maintain economic stability and support growth.” Read the full speech here.

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BPC outlined its suggestions to improve the FDIC’s strategy for resolving systemically important financial institutions (SIFIs) in March:

Comment on the Notice on the Resolution of Systemically Important Institutions: The Single Point of Entry (SPOE) Strategy
By BPC’s Financial Regulatory Reform Initiative’s Failure Resolution Task Force

“The task force report strongly supports the FDIC’s SPOE strategy, agreeing that it ?would be an effective means of resolving SIFIs, including those with significant cross-border or global operations’ and that it has the potential to ?succeed in solving a critical part of the too-big-to-fail problem, by allowing any SIFI to fail without resorting to taxpayer-funded bailouts or a collapse of the financial system.’? More needs to be done, however, to promote market discipline, predictability, certainty and transparency for all stakeholders in the process.” Read the task force’s statement of principles here and the full comment letter here.

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In September, Peter Fisher, former Treasury Under Secretary for Domestic Finance, delivered a fascinating speech on how future generations may view current efforts to reform regulation of the financial system:

The Pathology of Finance
Remarks by Peter R. Fisher, Senior Fellow, Center for Global Business and Government, Tuck School of Business at Dartmouth; and co-chair, BPC’s Systemic Risk Task Force

“Those of us here tonight can all imagine the economy as existing in three distinct strata or, if I stick to my medical metaphor, with three distinct circulatory systems: first, there are producers and consumers of goods and services, second there are sources and users of funds, and third, there are sources and absorbers of volatility. But many of our fellow citizens (perhaps the sect of macro-economists) simply cannot grasp the volatility system or, more importantly, the interactions of all three systems. My optimistic self is hopeful that our descendants will look back on these years as when we figured out the interactions of all three circulatory systems, at least with respect to governments’ acts and omissions of financial intervention.” Read the speech here. 

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Finally, the following piece on the complexity of implementing the Volcker Rule regulations proved interesting to our readers:

Volcker Rule Clarity: Waiting for Godot
By Christopher Scarpati, Gary Welsh, Shweta Jain, Christopher McGee and Jacob Kindberg, PricewaterhouseCoopers Financial Services Regulatory Practice

“Five months after regulators released the final Volcker rule, banks are pressing ahead with their implementation efforts, but are still waiting for promised guidance to clarify the rule’s many ambiguities. Reminiscent of last year when banks were expecting the final rule, industry commentators have already sounded false alarms regarding this guidance’s imminence. Also, despite establishing an interagency taskforce this year to reconcile supervisory views, the five regulators are again having difficulty coordinating. ? They are trying to understand the Volcker rule’s implementation challenges, but are not providing many answers.” Read the full report here.