What We're Reading: Financial Regulatory Reform, February 22

BPC’s Financial Regulatory Reform Initiative regularly highlights news articles, papers, and other important work which illuminate current and new thinking within financial regulation. We circulate these articles to provide a full view of cutting edge ideas, reactions and positions. 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, Justin Schardin, and Shaun Kern

Interview with Timothy Geithner

By David Wessel, The Wall Street Journal

“MR. WESSEL: A lot of people say that by any measure the big banks are bigger than they were before the crisis. Are they still ?too big to fail,’ especially if more than one goes at the same time?

“MR. GEITHNER: It is true that there’s been a decades-long trend to greater concentration in the U.S. financial system. It’s also true that that tendency was somewhat ? not dramatically, somewhat ? accentuated by the consolidation that happened in the crisis, and it was good that it happened in the crisis because it protected the taxpayer from having to absorb much more loss and it protected the economy from much more damage. But because of the reforms put in place and the much more conservative capital put in place, we’re much better able to absorb the consequences of failure of a big institution and much more able to be indifferent to any failures they face.” Read the full transcript here.

Overheating in Credit Markets: Origins, Measurement, and Policy Responses

Remarks by Federal Reserve Governor Jeremy Stein

“One of the most difficult jobs that central banks face is in dealing with episodes of credit market overheating that pose a potential threat to financial stability. As compared with inflation or unemployment, measurement is much harder, so even recognizing the extent of the problem in real time is a major challenge. Moreover, the supervisory and regulatory tools that we have, while helpful, are far from perfect.” Read the full speech here.

Financial Regulatory Reform: Regulators Have Faced Challenges Finalizing Key Reforms and Unaddressed Areas Pose Potential Risks

By the U.S. Government Accountability Office

“A variety of challenges affected regulators’ progress in implementing the [Dodd-Frank A]ct’s reforms. Regulators noted that completing rules has taken time because of the number and complexity of the issues, and because many rules are interconnected? Further, regulators said that implementing the act’s reforms requires a great deal of coordination at the domestic and international levels. Although regulators have established mechanisms to facilitate coordination and believe coordination efforts have improved the quality of the rulemakings, several regulators indicated that coordination increased the amount of time needed to finalize rulemakings. Finally, regulators noted that they have prioritized developing responsive, appropriate rules over meeting tight statutory deadlines. As a result, some important rules may take the longest to develop.” To read the full report, click here.

Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act

By the U.S. Government Accountability Office

“The 2007-2009 financial crisis has been associated with large economic losses and increased fiscal challenges. Studies estimating the losses of financial crises based on lost output (value of goods and services not produced) suggest losses associated with the recent crisis could range from a few trillion dollars to over $10 trillion.” To read the full report, click here.

The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It

By Anat Admati & Martin Hellwig

“[I]f the discussion of banking and banking regulation is left only to those who are directly concerned, the financial system will continue to be at risk from unsafe banking, and all of us may suffer the consequences. Only pressure from the public can bring forth the necessary political will. Without public pressure and political will, we can expect little change.” Read the first chapter here.

Banking On Our Future: The Value of Big Banks in a Global Economy

By Hamilton Place Strategies

“In an economy with global needs, large banks provide services that go beyond traditional banking activities. When individuals and businesses deposit funds with banks today, they not only help their neighbors build homes to live in, they also help fuel the growth of American companies at home and abroad.? This is the ongoing evolution of the economy and banking sector we have seen. Managing toward the future requires forward-looking policies. There is simply no way to return to the era of George Bailey, even if we wanted to.” Read the full report here.

Higher Bank Capital Requirements Would Come at a Price

By Douglas Elliott, The Brookings Institution

“A dangerous misconception appears to be taking root in the public debate about bank safety. A belief is growing that banks could be made much safer, at essentially no economic cost, by requiring shareholders to supply far more of the funding for banks with correspondingly less coming from debtholders and depositors. In fact, there would be significant economic costs, so there needs to be a debate centered on an examination of the trade-offs. Personally, I agree with the majority of analysts and policymakers that the costs would outweigh the benefits, but my key point here is that we need a debate on the trade-offs, wherever we come out on them.” See the full paper here.

Ending “Too-Big-to-Fail” ? Title II of the Dodd-Frank Act and the Approach of “Single Point of Entry” Private Sector Recapitalization of a Failed Financial Company

By The Clearing House

“In short, the FDIC’s single point of entry holding company recapitalization approach under Title II of the Dodd-Frank Act would be the resolution of a failure in which shareholders and creditors of the organization’s holding company would absorb the losses, as they should; taxpayers would bear no losses, as they should not; critical operating businesses of the organization would stay open to serve the real economy; new management and new ownership would be put in place; and the failure would not cause runs, defaults on derivatives, or financial panic? [I]t ends the perceived problem of ?too-big-to-fail.’” Read the entire paper here.

CoCos, Bail-In, and Tail Risk

By The Office of Financial Research

“Contingent convertibles (CoCos) and bail-in debt for banks have been proposed as potential mechanisms to enhance financial stability? Our calibrations suggest that CoCos could have had a significant impact on the largest U.S. bank holding companies in the lead up to the financial crisis.” Read the full working paper here.