Happy April Fools! As the spring season begins, we hope you enjoy these readings from the financial regulatory world.
What we’re reading on cyber insurance
Cyber Insurance: A Guide for Policymakers
By the Bipartisan Policy Center’s (BPC) Insurance Task Force
“In this issue brief, the Bipartisan Policy Center’s Insurance Task Force starts with the premise that a well-functioning market for cyber insurance, one that offers a robust range of products that meet the needs of consumers in a competitive environment, would benefit consumers, businesses, and national security. Reaching that goal will require overcoming some difficult obstacles. This paper provides a guide to policymakers on how best to address these obstacles and facilitate a well-functioning cyber insurance market in the United States.” Read the issue brief.
What we’re reading on nominations
“We Must End the New Normal of Fed Board Vacancies,” Op-ed, American Banker
By Justin Schardin, Acting Director, BPC’s Financial Regulatory Reform Initiative
“Recent headlines have dealt with all of the political complexity and legal uncertainty around filling Antonin Scalia’s Supreme Court vacancy. Yet historically, vacancies on the high court do not last very long. By contrast, appointing governors to fill open seats on the Federal Reserve Board has long been subject to extended delays, leaving the central bank chronically shorthanded.” Read the op-ed.
What we’re reading on financial regulation
Hensarling Remarks at American Bankers Association Summit
By Congressman Jeb Hensarling (R-TX), Chairman, House Financial Services Committee
“As we move forward, it’s important to remember that this is not going to be a debate between regulation and de-regulation. … On one side will be those who passionately believe you improve the economy by taking more from the private sector and consumers and giving it to bureaucrats in Washington because they are smarter than you. And on the other side are those of us who just as passionately believe the true source of prosperity is not and never will be found in Washington.” Read the speech.
“Ranking Member Waters Responds to Dodd-Frank ‘Alternative,’” Response to Chairman Hensarling’s Remarks
By Congresswoman Maxine Waters (D-CA), Ranking Member, House Financial Services Committee
“The Dodd-Frank law was enacted on the heels of the worst financial crisis our generation has seen. In the five-plus years since, our financial system is safer, fairer and stronger. We can always do more to improve our economy, but we shouldn’t give a handout to big banks that helped cause the crisis in the first place. Instead, we should focus on the communities that haven’t fully benefitted from the recovery and close the wealth gap among middle- and low-income households and minorities.” Read the response.
Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective
By the Office of the Comptroller of the Currency
“Innovation is not free from risk, but when managed appropriately, receptive to responsible risk should not impede progress. Indeed, effective risk management is essential to responsible innovation. Banks and regulators must innovation along with the strike the right balance between risk and innovation. …By employing their respective advantages, banks and nonbank innovators can benefit from collaboration. Through strategic and prudent collaboration, banks can gain access to new technologies, and nonbank innovators can gain access to funding sources and large customer bases.” Read the report.
“An Update on the Outlook, Liquidity, and Resilience,” Remarks at the Institute of International Bankers Annual Washington Conference, Washington, D.C.
By Lael Brainard, Member, Board of Governors of the Federal Reserve System
“As a result of the capital and liquidity regulations already in place as well as the associated stress tests, the eight most systemic U.S. banking organizations are now holding $800 billion more in high-quality liquid assets than they were in 2011 and $500 billion more in common equity capital than they were in 2008. … The long-term debt requirement together with rigorous resolution plans and operational preparedness, the capital surcharges along with the capital stress tests, and the availability of sufficient amounts of high-quality liquidity where it is most likely to be needed will all substantially decrease the risk that a large financial institution’s distress could pose to the broader financial system and help ensure that no banking institution is too large and too complex to fail.” Read the speech.
To G20 Finance Ministers and Central Bank Governors
Letter by Mark Carney, Governor, Bank of England and Chairman, Financial Stability Board
“Recent market turbulence really serves to underline the importance of continued progress in building resilient financial institutions and markets. The imperative now is to implement fully and consistently our past agreements. Authorities also need to remain vigilant to new risks and vulnerabilities and to ensure that markets are supported by robust financial infrastructure. In this manner the G20 can develop a diverse and open global financial system that can finance investment in the real economy throughout the economic cycle.” Read the letter.
Remarks by Counselor Antonio Weiss at the U.S. Chamber of Commerce Capital Markets Summit
By Antonio Weiss, Counselor to the Secretary of the U.S. Treasury
“The U.S. financial system has been tested several times since the crisis: from the taper tantrum to debt limit showdowns, and from last August through the early months of this year. Financial institutions have remained strong, supporting growth instead of working against it. In short, financial reform has passed its first series of tests. But, inevitably, the tests become more difficult, and we cannot be complacent. We must protect and build on the important progress made following the crisis, while adapting to a rapidly-evolving marketplace.” Read the speech.
“The Resilient Bank of the Future,” Banking Perspective, The Clearing House
By Martin Pfinsgraff, Senior Deputy Comptroller for Large Bank Supervision, Office of the Comptroller of the Currency
“If economic cycles hold true, we will approach another stress event at some point. Timing and magnitude are never certain, and one would hope that actions taken to bolster banking system resilience will mitigate the duration and severity of the next downturn. The ALM ratio developed after the failure of Continental indicates that large banks have significantly greater resources to withstand potential stress today than in 2007. Central banks, including the Federal Reserve, appear to have more constraints, both law- and balance-sheet driven, on their ability to support stressed markets. As in 2007, the non-bank sector is the most likely source of contagion risk.” Read the article.
“Building on these reports, this paper integrates data we have known about for a long time (e.g., bond ownership by pensions and insurers) with newer data that highlights structural changes to bond market liquidity. The purpose of this paper is not to suggest that market liquidity challenges should be ignored; to the contrary, it is imperative that market participants adapt to the changing market dynamics.” Read the report.
“Central banks and digital currencies,” Remarks at the London School of Economics
By Ben Broadbent, Deputy Governor for Monetary Policy, Bank of England
“A better term for the underlying technology, the distributed ledger, might be “decentralised virtual clearinghouse and asset register”. … Prospectively, it offers an entirely new way of exchanging and holding assets, including money. … Some admirers of bitcoin see it as a means of bypassing central banks altogether. They are in some ways the descendants of the supporters of “free banking” in the 19th century. Conversely, others see the distributed ledger as an opportunity for the central bank to expand its role, via a “central bank digital currency” available to a much wider group of counterparties. If it were a close substitute for bank deposits, a CBDC would represent a shift towards a “narrower” banking system.” Read the speech.
“Macroprudential Policy: A Case Study from a Tabletop Exercise,” Federal Reserve Bank of New York
By Tobias Adrian, Senior Vice President and Associate Director of Research, Federal Reserve Bank of New York; Patrick de Fontnouvelle, Vice President, Supervision and Regulation, Federal Reserve Bank of Boston; Emily Yang, Assistant Vice President, Financial Institutions Supervision Group, Federal Reserve Bank on New York; and Andrei Zlate, Economist, Emerging Market Economies Section, Federal Reserve Board of Governors
“In June 2015, a group of Federal Reserve Bank presidents participated in a tabletop exercise designed to assess the value of prudential policy tools in averting or easing financial crises. Presented with a hypothetical scenario of overheating financial markets, the participants were asked to consider how effectively various capital-based, liquidity-based, and credit-based tools, as well as stress testing and supervisory guidance, could address the risks inherent in the scenario. The group concluded that many prudential tools had limited applicability and could only be implemented with a lag. Tools that could be implemented more quickly, such as stress testing and margins on repo funding, were preferred to others. Surprisingly, monetary policy tools were judged to be an attractive alternative means of promoting financial stability.” Read the study.
As always, the views expressed in these articles do not necessarily represent the views of the initiative, its co-chairs, task force members or BPC.