What We're Reading: Financial Regulatory Reform, October 8

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

---

The Consumer Financial Protection Bureau: Measuring the Progress of a New Agency
By Rick Fischer and Eric Rodriguez, co-chairs of the Financial Regulatory Reform Initiative’s Consumer Protection Task Force

“Overall, the report concludes that when the Bureau operates in a transparent, open, and iterative manner, repeatedly seeking input from all stakeholders throughout a process, the results were generally positive. The Bureau was able to meet its statutory deadlines on a series of complex rules, while considering comments and revising initial findings to improve the final product. However, when the Bureau made unilateral decisions, rolled out initiatives, rules, or processes through a more closed, internal deliberation process, the results were far more likely to be problematic.” Read the full report here.

---

FSOC’s Designation of Prudential Financial, Inc. as a Systemically Important Nonbank
By Financial Stability Oversight Council

“Based on the Council’s evaluation of all the facts of record in light of the statutory factors that it is required to consider under the Dodd-Frank Act, the Council has concluded that material financial distress at Prudential could cause an impairment of financial intermediation or of financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy. Therefore, the Council has made a final determination that material financial distress at Prudential could pose a threat to U.S. financial stability and that Prudential should be subject to Board of Governors supervision and enhanced prudential standards.” The basis for the determination can be found here.

---

FSOC Member with Insurance Expertise’s Dissent on Prudential’s Designation

“The Basis and the administrative record lack any analysis as to how Prudential’s material financial distress would lead to a threat where “there would be an impairment of financial intermediation or financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy.” The Basis does not contain any analysis that presents any findings as to severe impairment of financial intermediation; severe impairment of the functioning of U.S. and global financial markets; or resulting significant damage to the economy. No empirical evidence is presented; no data is reviewed; no models are put forward. There is simply no support to link Prudential’s material financial distress to severe consequences to markets leading to significant economic damage.” The dissenting views can be found here.

---

Progress and Next Steps Towards Ending “Too-Big-To-Fail” (TBTF)
By Financial Stability Board

“The policy initiative to end TBTF is ambitious, but necessary. We have made good progress to date in putting the overall international policy framework in place. Detailed technical work is now giving real teeth to the policies. While much has been accomplished, more needs to be done to finish the job – through legislation and regulation to put in place at jurisdictional level the internationally agreed policies, and through practical application to individual institutions.” Read the full report here.

---

Asset Management and Financial Stability
By Office of Financial Research

“The U.S. asset management industry oversees the allocation of approximately $53 trillion in financial assets. The industry is central to the allocation of financial assets on behalf of investors… The diversity of these activities and the vulnerabilities they may create, either separately or in combination, has attracted attention to the potential implications of these activities for financial stability… Unfortunately, there are limitations to the data currently available to measure, analyze, and monitor asset management firms and their diverse activities, and to evaluate their implications for financial stability. These data gaps are not broadly recognized… Data on some activities—such as involvement in repo transactions and the reinvestment of cash collateral from securities lending—are incomplete, thereby limiting visibility into market practices.” Read the full report here.

---

Financial Stability Oversight Council’s 2014 Budget
By United States Department of Treasury

“Pursuant to … the Council’s Rules of Organization, the Chairperson shall propose an annual budget for the Council, which upon an affirmative vote of a majority of the voting members then serving shall be adopted as the annual budget of the Council.” See the full report here.

---

Banking Risks are Slowly Receding in Much of the World, But Watch Out for the Hot Spots
By Standard & Poor’s Ratings Services

“Although credit and liquidity risks generally have lessened and in most regions have somewhat stabilized compared to five years ago, we see several hot spots. In the West, Standard & Poor’s Ratings Services currently sees a number of risks in the eurozone’s banking system, despite the first signs of a cautious economic recovery. While risks are abating in the U.S., the Federal Reserve’s signal to taper off quantitative easing and fears of rising interest rates could have global repercussions, especially for emerging markets like India and Brazil. Over in the East, China’s economy is cooling, credit and asset price bubbles look primed to burst, and the shadow banking system is brewing strong credit growth.” See the full article here.

---

Business on Banking: How Large U.S. Financial Institutions Help Companies Create Growth and Opportunity for America
By The Business Roundtable

“To compete in this global marketplace, U.S. companies rely on an array of financial products and services, including cash management services, foreign exchange services, large loans, and debt and equity offerings. These financial products and services provide critical infrastructure for modern multinational companies — essential tools that facilitate key business operations (e.g., investing in research activities, purchasing equipment and software, building new plants and buildings, and processing sales transactions). Large U.S. banks are often uniquely positioned to deliver this critical infrastructure.” See the full paper here.

---

Tax Exemption for Credit Unions: An Unjustifiable $10 Billion Tax Expenditure
By Kenneth Kies and Bert Ely

“Credit unions have grown to control a significant share of the market for banking services, particularly in retail banking. However, unlike their direct competitors—commercial banks and thrift institutions—credit unions do not pay corporate income taxes. This huge tax expenditure—nearly ten billion dollars over the next five years, according to the Office of Management and Budget—no longer has any policy or economic justification. Credit unions have evolved to become large financial institutions which provide services that are identical to their taxpaying competitors. In order to level the competitive playing field in the banking industry, all credit unions should pay corporate income taxes.” Read the full report here.