What We’re Reading: Financial Regulatory Reform, June 21

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

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Regulatory Landscapes: A U.S. Perspective

Remarks by Federal Reserve Vice Chairman Janet Yellen

“A major source of unaddressed risk emanates from the large volume of short-term securities financing transactions (SFTs)–repos, reverse repos, securities borrowing and lending transactions, and margin loans–engaged in by broker-dealers, money market funds, hedge funds, and other shadow banks. Regulatory reform mostly passed over these transactions, I suspect, because SFTs appear safe from a microprudential perspective. But SFTs, particularly large matched books of SFTs, create sizable macroprudential risks, including large negative externalities from dealer defaults and from asset fire sales. The existing bank and broker-dealer regulatory regimes have not been designed to materially mitigate these systemic risks. The global regulatory community should focus significant amounts of energy, now, to attack this problem. The perfect solution may not yet be clear but possible options are evident: raising bank and broker-dealer capital or liquidity requirements on SFTs, or imposing minimum margin requirements on some or all SFTs.” Read the full paper here.

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Let’s Move Forward: The Case for Timely Implementation of Revised Capital Rules

Remarks by Federal Reserve Governor Sarah Bloom Raskin

“[T]ime is of the essence here in moving forward with the Basel III final rules. The proposed rules were not perfect and I expect there to be meaningful modifications. At the same time, while we attempt to craft a risk-based system that makes sense from the perspective of safety and soundness, we have to resist the temptation to believe we can create a perfectly sensitive risk-based regime that gives the illusion of safety. Such a regime would not be a meaningful surrogate for effective on-site supervision, and the effort to try to create an ever-more refined system would distract us from some of the important policy questions that lie ahead for our financial system. Finally, there are costs to complexity that should not be ignored. We shouldn’t be lulled into thinking that these unnecessary costs should be allocated to community banks, which are a segment of our financial system that provides meaningful benefits to many Americans.” Read the full speech here.

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Taking the Time to Get It Right: The Cross-Border Regulatory Framework

Remarks by CFTC Commissioner Scott O’Malia

“[T]he Commission must come up with a workable definition of U.S. person. As I mentioned, this definition should be harmonized with the SEC’s definition. Market participants have enough compliance burdens as it is; to force them to deal with two different U.S. person definitions from two U.S. regulators would be beyond unfair. Speaking of fairness, the U.S. person definition should be finalized in a way that does not create disincentives to trading with firms that fall into the definition. Such an uneven playing field would unfairly disadvantage U.S. firms, and that would be unacceptable to me.” Read the full speech here.

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Cinema of Uncertainty

Remarks by CFTC Commissioner Bart Chilton

“[T]he five largest U.S. commercial bank derivatives dealers account for 93 percent of the $223 trillion of notional value of the U.S. bank derivatives markets. Those five have over 3,300 foreign subsidiaries. The risk that builds up in one or a handful of these foreign subsidiaries (or any foreign entity otherwise deeply interconnected with U.S. firms) can, and in recent history has, led to risks to the U.S. and international economy. This isn’t just a U.S. dilemma… systemic risk doesn’t follow national boundaries. That’s why the G20 has, repeatedly, sought swaps reforms, even envisioning an end-2012 implementation of derivatives market reform commitments.” Read the full speech here.

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Director Cordray remarks before the Exchequer Club

Remarks By CFPB Director Richard Cordray

“[O]ur regulatory implementation project goes further than simply reacting passively to industry inquiries. We are also taking more affirmative steps to help the industry understand our rules. We have published plain-language guides that we will update as necessary. We have launched a series of videos explaining our rules. We are working closely with the other financial regulators to develop examination guidelines that reflect a common understanding of what the rules do and do not require, which are on track to be published well before their effective date next January. This work reflects close cooperation between the Consumer Bureau and the prudential regulators and our mutual desire to conduct examinations consistently. We are also distributing a readiness guide with a checklist of things to do before the rules take effect – like updating policies and procedures and providing staff training. And we are consulting with consumer groups to determine how best to educate consumers with understandable information about how the new rules will affect them.” See the full speech here.

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Financial Services in the New Trade Negotiations with Europe

By Martin Baily and Douglas Elliot

“The U.S. and the European Union (EU) will soon begin formal negotiations for a new treaty to further open up trade and investment across the Atlantic. Officials are attempting now to agree on the overall framework for the Transatlantic Trade and Investment Pact (TTIP), which will then guide the laborious and politically sensitive negotiations. An important question is whether and to what extent financial services will be included in the treaty. Ideally, an ambitious effort will be undertaken in this area to put transatlantic coordination of key financial reforms back on track.” See the full op-ed here.

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The Coming Clash Between Financial Technology and Financial Regulators

By Aaron Klein, Director of BPC’s Financial Regulatory Reform Initiative, and Jim Sivon, Partner at Barnett, Sivon & Natter, P. C.

“Every time a consumer deposits a check electronically at an ATM or by taking a picture with their smart phone, they can thank the Check 21 Act for making that possible. A decade after passage, banks are now competing to provide the best app to allow consumers to deposit checks from their living room. Technology companies are frequently providing the power behind the app. Moreover, CFPB already has shown interest in promoting new technologies that expand the range of financial products and services for consumers. The Treasury Department recently sponsored a competition for innovative applications to “enhance consumer financial capability and decision-making.” Government is clearly trying to promote new technology to provide consumers additional opportunities to access financial services and make more informed financial choices.” Read the full op-ed here.

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Resolving the Unresolvable: The Alternative Pathways to Ending Too Big to Fail

Remarks by Federal Reserve Bank of New York General Counsel Thomas Baxter

“History shows that they made the decision to provide rescue financing. They did so not because they wanted to aid AIG, but because they wanted to avoid adverse consequences to the American people. The failure of AIG, especially given the context where Lehman had failed the day before, would have triggered knock-on failures throughout our financial markets, and ignited a panic that would have produced, almost inevitably, severe financial instability. In a recently published report, the Bipartisan Policy Center said: “If the only choices are between bailout and fire-sale liquidations or value-destroying reorganizations that can result in contagious panic and a collapse of the financial system, responsible policymakers typically choose a bailout as the lesser of two evils.” In the early morning of September 16, 2008, we are fortunate that the people making the decision to rescue AIG were all responsible policymakers.” See the full remarks here.

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Too Big to Fail in the Dodd-Frank Era

BPC’s Failure Resolution Working Group Member Randall Guynn

 

“Davis Polk Partner Randall Guynn speaks with Bloomberg Law’s Lee Pacchia about how Dodd-Frank’s orderly liquidation authority (OLA) gives lawmakers better choices when faced with the failure of complex financial institutions. Guynn highlights the need for pre-announced, predictable strategies for high speed re-capitalizations.

 

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Memorandum of Understanding on the Resolution of Firms with Cross-Border Operations in the United States and Canada

By the Federal Deposit Insurance Corporation and the Canada Deposit Insurance Corporation

“In view of the growing globalization of the world’s financial markets and the increase in cross-border operations and activities of financial service firms, including large complex insured depository institutions, the Federal Deposit Insurance Corporation (“FDIC”) of the United States and the Canada Deposit Insurance Corporation (“CDIC”) have reached this Memorandum of Understanding (“MOU”) on the exchange of information and cooperation in connection with the planning and the implementation of such planning with respect to Firms with cross-border operations, as and to the extent within the purview of the parties” Read the full memorandum here.

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CFPB Study of Overdraft Programs

By the Consumer Financial Protection Bureau

“Nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage. Additionally, our study notes progress in some areas in recent years in protecting consumers from harm. Nonetheless, our findings with respect to the number of consumers who are incurring heavy overdraft fees or account closures and the wide variations across institutions indicate that certain practices and procedures merit further analysis to determine whether they are causing the kind of consumer harm that the federal consumer protections laws are designed to prevent. The CFPB will continue its study of overdraft programs, including through analysis of account-level data, to examine the extent to which particular policies magnify risks to consumers.” Read the full paper here.