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Financial Reform Must-Reads, December 11

Happy holidays and we hope you enjoy these readings from the financial regulatory world. 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.

Compiled by Aaron Klein, Justin Schardin, Kristofer Readling and Olivia Weiss.

What we’re reading from the Oversight of the Financial Stability Oversight Council hearing before the U.S. House of Representatives Committee on Financial Services

Testimony by S. Roy Woodall, Jr., Independent Member with Insurance Expertise, Financial Stability Oversight Council, U.S. Department of the Treasury

“Just last month, the Bipartisan Policy Center and its Insurance Task Force issued a report that recommended that Congress should step in, if necessary, to resolve this ongoing dispute if the three U.S. IAIS members, referred to as ‘Team USA,’ continue to be unable to reach consensus: …‘The independent member should be included on ‘Team USA’ and consulted by its other members on all issues in which systemic risk overlaps with insurance. … The Treasury Department, FIO, the Federal Reserve and the NAIC should support giving the independent member formal access to any IAIS and FSB materials, meetings, and discussions related to insurance and systemic risk. The task force sees real benefits, and no downside, to implementing this recommendation. It can be implemented without legislation, but Congress should step in if progress is not made to do so.” Read the testimony.

Testimony by Mary Jo White, Chair, U.S. Securities and Exchange Commission

“In particular, the SEC’s historical tripartite mission necessarily gives the SEC unique insight into many areas on which the Council is focused, such as the potential financial stability risks of asset management activities and products, the ongoing changes to market structure, and the role of central counterparties. … SEC staff has been actively engaging with representatives of other Council members in the analysis of potential financial stability risks posed by asset management activities and has been sharing its expertise on asset management, including the ways in which asset management activities differ from banking activities.” Read the testimony.

Testimony by Richard Cordray, Director, Consumer Financial Protection Bureau

“The creation of the FSOC provides, for the first time, a means of comprehensively monitoring the stability of our nation’s financial system. Prior to the crisis, the U.S. financial regulatory framework focused more on individual institutions and markets in isolation from one another. No one regulatory body was responsible for monitoring and addressing overall risks to financial stability, which too often involve different types of financial firms operating in complex and intertwined ways across multiple markets. The potential for supervisory and regulatory gaps were viewed as creating blind spots in important parts of the financial system.” Read the testimony.

What we’re reading on financial regulation

“Commissioner Aguilar’s (Hopefully) Helpful Tips for New SEC Commissioners,” Public Statement
By Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission

“My goal is to possibly shorten a new Commissioner’s overall learning curve and, at the same time, provide some helpful tips for maneuvering through the role of an SEC Commissioner. … Understand the substantive rules and procedural processes at the SEC, e.g., how rulemakings work, how enforcement recommendations work, how seriatim votes work, etc. … There is no formal mechanism by which you will meet your counterparts at other federal or state regulatory agencies, such as the CFTC. You will need to be proactive and reach out to them directly to introduce yourself and make regular contacts.” Read the statement.

“Safe Assets as Commodity Money,” Working Paper, Office of Financial Research
By Maya Eden, Economist, World Bank and Benjamin Kay, Economist, Office of Financial Research

“In particular, we argue that, since the production of safe assets requires real resources and since safe assets carry coupon payments that are valued regardless of their use as a medium of exchange, the appropriate conceptual framework for understanding their properties is as commodity rather than fiat money. Our model suggests two main implications: (a) changes in the quantity of safe assets can have real effects on the quantity of trading (even absent nominal rigidities), and (b) there is overproduction of safe assets.” Read the paper.

“Don’t Let Big Banks Sabotage Reg Relief for Small Banks,” Op-ed in American Banker
By Michael S. Barr, Fellow, Center for American Progress and professor of law, University of Michigan Law School

“There is undoubtedly much that could be done to reduce regulatory burden on the smallest banks. … Strong, compliant small banks should have longer examination cycles and streamlined reporting requirements. Regulators and the industry should come together in a task force to come up with better ways to catch terrorists and criminals who use the financial system, while imposing lower regulatory burdens on banks. And we need a level playing field for small business lending, so community banks can compete with nonbank providers to provide safe, transparent, consumer-friendly loans to small businesses and entrepreneurs.” Read the op-ed.

“Financial Stability and Shadow Banks: What We Don’t Know Could Hurt Us,” Remarks at the 2015 Financial Stability Conference sponsored by the Federal Reserve Bank of Cleveland and the Office of Financial Research, Washington, D.C.
By Stanley Fischer, Vice Chairman, Board of Governors, Federal Reserve System

“Data on a range of activities–including securities lending, bilateral repos, and derivatives trading–that create funding and leverage risks remain inadequate and hence could prove destabilizing if sufficiently large or widespread. … But it is also true that little research has been undertaken that distinguishes between banks and nonbanks, or highlights how their interactions are driven by economic incentives. Such research could guide regulator efforts to collect data and set policies to limit possible instabilities associated with interconnectedness.” Read the speech.

What we’re reading on consumer issues

Opening Remarks at the 2015 Financial Inclusion Forum
By Jacob J. Lew, Secretary, U.S. Department of the Treasury

“In 2010, 26 million American consumers had too limited financial history to even get a credit score, which means even if they paid their bills, they would not have access to credit. … We are also aware of the growing concern that some large banks are terminating their correspondent relationships and restricting access of money service businesses to bank accounts. We remain deeply committed to addressing the challenges surrounding correspondent banking relationships and money services businesses in a way that protects our joint goals of supporting financial inclusion and protecting the financial system from illicit activity.” Read the speech.

“CFPB Director Cordray Responds to Complaint-Portal Story,” Response to the Editor in American Banker
By Richard Cordray, Director, Consumer Financial Protection Bureau

“The story cites only three purported ‘errors’ out of hundreds of thousands of complaints handled. And since American Banker refused to provide documentation or tracking numbers to the Bureau, it is unclear whether any of these were at all significant. Director Cordray does not dispute any of the examples given in the article. American Banker spoke with five current and former CFPB officials for the story. Those people, all of whom had knowledge of the database and its inner workings, agreed that it had serious problems, so much so that they were afraid to trust information from it.” Read the response and the original article.

“The Consumer Credit Card Market,” Report
By the Consumer Financial Protection Bureau

“Overall, the Bureau found that cardholders faced lower all-in costs for using their credit cards in the wake of the [CARD] Act. For the card issuers represented in the Bureau’s credit card database, which account for between 85% and 90% of credit card industry balances, the ‘Total Cost of Credit’ declined by 194 basis points between the fourth quarter of 2008 and the fourth quarter of 2012. The 2013 report also found that prior to the enactment of the CARD Act, but after the onset of the recession, credit of all kinds became less available to consumers—including in the credit card market. In that market, credit availability picked up again from 2009, although by the end of 2012, it had not returned to pre-recession levels. Even at that point, however, consumers had nearly $2 trillion in unused consumer credit card line.” Read the report.

What we’re reading on payments

“, LLC v. Thomas J. Dart, Sheriff of Cook County, Illinois,” in the United States Court of Appeals For the Seventh Circuit
By the United States Court of Appeals For the Seventh Circuit, heard before Circuit Judges Posner, Ripple, and Sykes

“The Sheriff of Cook County, Tom Dart, has embarked on a campaign intended to crush Backpage’s adult section— crush Backpage, period, it seems—by demanding that firms such as Visa and MasterCard prohibit the use of their credit cards to purchase any ads on Backpage. … Visa and MasterCard bowed to pressure from Sheriff Dart and others by refusing to process transactions in which their credit cards are used to purchase any ads on Backpage, even those that advertise indisputably legal activities. He is using the power of his office to threaten legal sanctions against the credit-card companies for facilitating future speech, and by doing so he is violating the First Amendment unless there is no constitutionally protected speech in the ads on Backpage’s website—and no one is claiming that.” Read the decision.

What we’re reading on the Federal Reserve

“Fed emergency lending,” the Brookings Institution
By Ben S. Bernanke, Distinguished Fellow in Residence, Economic Studies Program and Former Chairman, Board of Governors, Federal Reserve System

“My biggest concern about the collective impact of the reforms is related to what economists call the stigma of borrowing from the central bank. For lender-of-last resort policies to work, financial institutions have to be willing to avail themselves of the central bank’s loans. … If financial institutions won’t borrow, then the central bank won’t be able to inject the liquidity necessary to stop the panic, at least not until conditions are extreme. Deprived of access to funding, financial firms will instead hoard cash, dump assets, cut credit, and call in loans, with bad effects on the whole economy.” Read the post.

“What if Another Federal Reserve Board Vacancy Opens Before 2017?”
By Justin Schardin and Aaron Klein

“The membership of the Federal Reserve Board of Governors (Board) stands now where it has for more than a year-and-a-half: at five confirmed governors and two vacancies. This situation is a bit precarious because if one of the five governors were to leave, it would be difficult for the Board to operate effectively. History suggests that this scenario is one the Board may face before the end of 2016, if the Senate does not confirm any new governors.” Read the post.

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