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Financial Reform Must-Reads, April 29

Happy Arbor Day! As spring brightens, we hope you enjoy these readings from the financial regulatory world.

Compiled by Justin Schardin, Dora Engle, and Kristofer Readling.

What we’re reading on too-big-to-fail

Regulators, Banks Move to New Stage on Living Wills
By Justin Schardin and Kristofer Readling

“For the first time ever, the Federal Reserve Board (Fed) and the Federal Deposit Insurance Corporation (FDIC) exercised an authority created by the Dodd-Frank Act to deem the resolution plans, or “living wills,” of five of the eight largest systemically important U.S.-based banks “not credible.” This week’s decision moves regulators into a new stage in the post-crisis effort to ensure that some of the country’s biggest banks are no longer too big to fail, a stage that could result in substantial structural changes being forced on these banks by regulators.” Read the blog post.

Ending Too Big to Fail Policy Symposium on April 4
Hosted by the Federal Reserve Bank of Minneapolis

“In its first policy symposium on ending the problem of financial institutions that are too big to fail (TBTF), the Federal Reserve Bank of Minneapolis heard proposals to require large banks to hold much more capital, to limit banks’ size and to consider the benefits and costs when developing new regulations.” Read the event summary.

  • Panel 1: Substantially increasing capital requirements, with panelists Anat R. Admati, Deborah Lucas, Adam S. Posen, Til Schuermann, and Phillip Swagel. Watch the video.
  • Panel 2: Altering the organizational structure of financial institutions, with panelists Simon Johnson, Joseph P. Hughes, Aaron Klein, Ross Levine, and Eugene Ludwig. Watch the video.
  • Neel Kashkari’s update on the Minneapolis Fed’s Ending Too Big to Fail Initiative. The next symposium is scheduled for May 16 and will feature John Cochrane and John Bovenzi.

Details for the symposium are available here.

What we’re reading on the regulation of fintech

Senate Letter to the Government Accountability Office requesting report on fintech
By Jeff A. Merkley (D-OR), Sherrod Brown (D-OH), and Jeanne Shaheen (D-NH)

“Observers have questioned what the appropriate role of federal regulators should be in supervising fintech companies that provide small business capital and consumer lending. … However, it is possible that the current online marketplace for small business loans falls between the cracks for federal regulators. … We are very interested in ensuring that fintech provides credit to small businesses and consumers in a way that prevents abusive practices while expanding economic opportunity.” Read the letter.

“The Use of Distributed Ledger Technologies in Payment, Clearing, and Settlement,” Remarks at the Institute of International Finance Blockchain Roundtable, Washington, D.C.
By Lael Brainard, Member, Board of Governors of the Federal Reserve System

“In safeguarding the public interest, the first line of inquiry and protection will always rest with those closest to the technology innovations and to the organizations that consider adopting the technology. But regulators also should seek to analyze the implications of technology developments through constructive and timely engagement. We should be attentive to the potential benefits of these new technologies, and prepared to make the necessary regulatory adjustments if their safety and integrity is proven and their potential benefits found to be in the public interest.” Read the speech.

Banking reimagined: How disruptive forces will radically transform the industry in the decades ahead
By Val Srinivas, Ph.D., Research Leader, Banking & Securities, Deloitte Center for Financial Services

“The main premise is, of course, that banking is going to look a lot different in 10 years time. Many traditional players now face the choice of either being disintermediated or proactively disrupting their own business models to thrive in the future. To help understand the effect of disruptions, we took it upon ourselves to reimagine the future of banking and capital markets in the next five to 10 years. In this special report, we examine how various disruptive trends we are seeing today in areas such as artificial intelligence and machine learning, blockchain technology, collaborative ecosystems, cryptocurrencies, demographics, and customer experience are coming together to influence the future of banking.” Read the report.

“Fintech: The Power of the Possible and Potential Pitfalls,” presentation to the LendIt USA 2016 conference
By John C. Williams, President and CEO, Federal Reserve Bank of San Francisco

“As the fintech industry continues to grow, both as nonbank institutions and via partnerships with banks, potential risks to the financial system and economy expand in proportion. Moreover, for our financial system to be efficient, it’s important that we have a level playing field, regardless of how institutions prefer to describe themselves or what kind of charter they hold. As a matter of principle, if it walks like a duck and quacks like a duck, it should be regulated like a duck.” Read the speech.

What we’re reading on prudential regulation

Financial Stability Oversight Council Update on Review of Asset Management Products and Activities
By the Financial Stability Oversight Council

“The asset management industry’s increasing significance to financial markets and to the broader economy underscores the need for the Council’s consideration of potential risks to U.S. financial stability from this sector. … The Council is providing this public update on its review of potential risks to financial stability that may arise from certain asset management products and activities. As outlined below, the Council and staffs of its members and member agencies have carried out analyses and engaged in dialogue regarding these issues. Based on this work, the Council has identified certain areas of potential financial stability risk and is providing its views on key areas of focus and next steps to respond to these potential risks.” Read the report.

“Are Stress Tests Still Informative?” Federal Reserve Bank of New York
By Beverly Hirtle, Senior Vice President, Research and Statistics Group, Anna Kovner, Assistant Vice President, Research and Statistics Group, and Samantha Zeller, Senior Research Analyst, Research and Statistics Group

“In summary, we find that while the size of the market reaction to U.S. supervisory stress test disclosures has decreased since the 2009 SCAP, the disclosures seem to provide meaningful information to investors and other capital market participants—even for the recent stress test results. Our findings suggest that supervisory stress test disclosures continue to provide new information, in addition to serving as a supervisory mechanism for assessing the capital adequacy of large, complex BHCs.” Read the blog post.

What we’re reading on insurance

“The Insurance Sector — Trends and Systemic Risk Implications,” Chapter 3 of Global Financial Stability Report: Potent Policies for a Successful Normalization, April 2016
By the International Monetary Fund

“The chapter shows that across advanced economies the contribution of life insurers to systemic risk has increased in recent years, although it clearly remains below that of banks. This increase is largely due to growing common exposures to aggregate risk, caused partly by a rise in insurers’ interest rate sensitivity. Thus, in the event of an adverse shock, insurers are unlikely to fulfill their role as financial intermediaries precisely when other parts of the financial system are failing to do so as well. The higher common exposures do not seem to be driven by marked changes in insurers’ investment portfolios, although smaller and weaker insurers in some countries have taken on more risk.” Read the report.

Cyber Insurance Market Watch Survey: Executive Summary
By The Council of Insurance Agents and Brokers

“The Council of Insurance Agents and Brokers is pleased to release the results of its second semi-annual Cyber Insurance Market Watch Survey. Sixty-five (65) respondents from 56 unique member firms responded to a set of 18 questions designed to provide insights into the burgeoning cyber insurance market and create a snapshot of the market to help us monitor changes and trends going forward.” Read the executive summary.

What we’re reading on cybersecurity

Remarks by Deputy Secretary Sarah Bloom Raskin at the Cybersecurity Docket’s Incident Response Forum 2016
By Sarah Bloom Raskin, Deputy Secretary of the U.S. Department of the Treasury

“Given the increasing number and morphing nature of cyber assaults, we must prepare for the eventuality of significant cyber incidents. By deploying the tools of preparation, coordination, and practice, the government, the financial sector, and their advisors can exponentially accelerate cyber response and can recover in a way that does not prolong the opportunity for damage—damage not only to the firms that compose our nation’s financial infrastructure, but also damage to the people of our country who rely on this financial infrastructure. With this preparation, if and when asignificant cyber incident occurs, we will be better equipped to respond and recover with level heads, and carry on with the business of returning to normal functioning.” Read the speech.

The views expressed in these articles do not necessarily represent the views of the initiative, its co-chairs, task force members or BPC.

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