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Financial Reform Must-Reads, February 5

Friday, February 5, 2016

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Thanks to everyone who came to our recent events on failure resolution and Puerto Rico. As you prepare for the Super Bowl, take a moment to enjoy these winning reads from the financial regulatory world.

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

What we’re reading and watching on failure resolution

Ending Too Big to Fail: Reform and Implementation
By the Bipartisan Policy Center and Hoover Institution

“The event, hosted by Hoover Institution and Bipartisan Policy Center, coincided with the release of Hoover Institution’s newest book, Making Failure Feasible: How Bankruptcy Reform Can End Too Big To Fail, and is a follow-up to BPC’s paper, Too Big To Fail: The Path to a Solution, which examines the failure resolution provisions in the Dodd-Frank Act. Hoover Institution Senior Fellow John Taylor and the University of Rochester’s President Emeritus Thomas Jackson gave remarks and a panel of experts followed to discuss questions such as: Will new capital requirements prevent short-term liquidity shortage and widespread panic in the financial markets? What changes to the Bankruptcy Code are necessary to ensure financial distress is contained? Do the FDIC’s proposals for orderly liquidation increase the certainty of a successful resolution?” Watch the event. Read BPC’s report.

“The Relative Role of Debt in Bank Resiliency and Resolvability,” Remarks Presented to the Peterson Institute for International Economics, Washington, DC
By Thomas M. Hoenig, Vice Chairman, Federal Deposit Insurance Corporation

“Adding leverage to the banking system in the hope that this will prove to be stabilizing is a gamble. There is considerable evidence that strategies that encourage increasing leverage within the banking industry have in past crises only exacerbated losses. The goal is resilience and, if necessary, resolution without government or taxpayer assistance. That is best achieved not by increasing leverage, but by requiring the right balance of debt and added equity for each firm and the industry as a whole.” Read the speech.

Banks and Regulators Converging on Living Wills
By Aaron Klein, Justin Schardin, and Kris Readling, Bipartisan Policy Center

“Banks and regulators appear to be more aligned in their views on how to prepare for any financial distress. A review by the Bipartisan Policy Center’s Financial Regulatory Reform Initiative (FRRI) of so-called ‘living wills’ required of large financial institutions in the aftermath of the financial crisis found encouraging signs that banks and regulators are getting onto the same page.” Read the post.

“Progress on Addressing ‘Too Big To Fail,'” The Financial Stability Institute, Cape Town, South Africa
By Eric S. Rosengren, President & Chief Executive Officer, Federal Reserve Bank of Boston

“I should note that all the capital regulations are not fully phased in, and the countercyclical capital buffer is currently zero, and the actual GSIB surcharge is dependent on actions the banks may take to reduce the surcharge. In addition, it has not yet been decided by the Board of Governors of the Federal Reserve whether GSIB institutions will be required to include all or part of the surcharge in the capital required by the CCAR. If they were required to, or if the post-stress CCAR minimums were increased by other means, the stress tests would be even more binding on GSIB institutions. … My own personal view is that GSIB institutions should be required to increase post-stress minimums, through one means or another.” Read the speech.

What we’re reading on financial regulation

“United States of America Department of the Treasury Financial Stability Oversight Council NonBank Financial Company Hearing,” MetLife v. Financial Stability Oversight Council, November 3, 2014
By Steven Kandarian, Chairman, President and CEO, MetLife

“I would caution that FSOC should not assume that it can designate MetLife, see how it goes, come back to it two or three or four years later, and maybe we are not so systemic after all, and we can reverse things. The market won’t allow us to operate that way, especially if the capital rules are really harsh. Activism investment alone will put tremendous pressure on the company to do a number of things, including restructuring the company. Now restructuring MetLife might be acceptable to FSOC if there is some benefit to the financial system, that some threat is now removed. I accept that. But we have proved, I believe, with the evidence we put forward that is not the case. The consequences, on the other hand, are clear: higher consumer costs, competitive distortions in the marketplace, and the potential dismantling of MetLife, with no taxpayer benefit.” Read the hearing transcript.

Office of Financial Research 2015 Report to Congress

“Threats to U.S. financial stability have crept higher since our 2014 Annual Report, but are still moderate in our judgment. Events since we published our 2015 Financial Stability Report last month, including the Federal Reserve’s subsequent incremental increase in short-term interest rates, have not altered that conclusion. Three key vulnerabilities stand out: (1) the long-term impact on risk-taking of persistently low interest rates, (2) mounting debt and declining credit quality in U.S. corporations and emerging-market countries, and (3) weaknesses that remain in the system despite financial reforms and better risk management by financial companies.” Read the report.

“The Lender of Last Resort Function after the Global Financial Crisis,” IMF Working Paper
By Marc Dobler, ‎ Simon Gray, Diarmuid Murphy, and Bozena Radzewicz-Bak, International Monetary Fund

“The global financial crisis (GFC) has renewed interest in emergency liquidity support (sometimes referred to as “Lender of Last Resort”) provided by central banks to financial institutions and challenged the traditional way of conducting these operations. Despite a vast literature on the topic, central bank approaches and practices vary considerably. In this paper we focus on, for the most part, the provision of idiosyncratic support, approaching it from an operational perspective; highlighting different approaches adopted by central banks; and also identifying some of the issues that arose during the GFC.” Read the report.

What we’re reading on virtual currencies, cybersecurity, and anti-money laundering

“Virtual Currencies and Beyond: Initial Considerations,” IMF Staff Paper
By Dong He, Karl Habermeier, Ross Leckow, Vikram Haksar, Yasmin Almeida, Mikari Kashima, Nadim Kyriakos-Saad, Hiroko Oura, Tahsin Saadi Sedik, Natalia Stetsenko, and Concepcion Verdugo-Yepes, International Monetary Fund

“Regulators have begun to address these challenges, with a variety of approaches across countries. Responses have included clarifying the applicability of existing legislation to VCs, issuing warnings to consumers, imposing licensing requirements on certain VC market participants, prohibiting financial institutions from dealing in VCs, completely banning the use of VCs, and prosecuting violators. These approaches represent an initial policy response to the challenges that VCs pose, but further development is needed. In particular, national authorities will need to calibrate regulation in a manner that appropriately addresses the risks without stifling innovation.” Read the paper.

“Supervisory Insights,” Vol. 12, Issue 2
By the Federal Deposit Insurance Corporation

“The FDIC has taken a number of steps to increase industry awareness of cyber risks and to provide practical tools to help mitigate the risk of cyber attack. … In the summer of 2015, the FDIC created a cybersecurity awareness training program for FDIC-supervised institutions, as well as FDIC supervision staff and management. … In November 2015, the FDIC added three additional video simulation exercises to Cyber Challenge as well as a Cybersecurity Awareness video that provides an overview of the threat environment and steps community financial institutions can take to be better prepared should a cyber-attack occur.” Read the report.

Remarks By Under Secretary Nathan Sheets at The Center For Global Development
By Nathan Sheets, Undersecretary for International Affairs, U.S. Department of the Treasury

“We need to continue to improve our understanding of the scope, nature, and drivers of the problem through better data collection. … Second, we need to explore the scope for FATF and financial supervisors to further clarify regulatory expectations regarding AML/CFT, while at the same time working to promote and help build the capacity for more consistent compliance with AML/CFT regulations in all economies, large and small. … Third, we need to facilitate effective communication among stakeholders across borders. This includes sharing AML/CFT information through a number of channels, including supervisor-to-supervisor, bank-to-bank, and supervisor-to-bank, in both directions.” Read the speech.

What we’re reading on monetary policy

“Recent Monetary Policy,” Remarks at the C. Peter McColough Series on International Economics, Council on Foreign Relations, New York
By Stanley Fischer, Vice Chairman, Board of Governors of the Federal Reserve System

“The Committee would be concerned if inflation were running persistently above or below our objective. In my view, even if inflation was expected to return to 2 percent over time, persistent deviations from our goal in either direction could cause economic harm and could ultimately unmoor longer-term inflation expectations. … The Committee has indicated that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively. But that statement leaves open the question of when we should begin to reduce the size of our balance sheet. … The decision about when to cease or begin phasing out reinvestment will depend on how economic and financial conditions and the economic outlook evolve.” Read the speech.

What we’re watching on Puerto Rico

Puerto Rico’s Debt Crisis: Strategies and Solutions
By the Bipartisan Policy Center

“Puerto Rico is in the process of defaulting on various debts. Panelists discussed approaches to confront this growing problem, how to best provide the Commonwealth a path to solvency and stability, and how to address the current legal structures which limit potential solutions. Options may include establishing fiscal oversight, enacting restructuring legislation, increased funding from Congress, or allowing the markets and courts to sort the situation out.” Watch the event. Watch the House Committee on Natural Resources hearing on Puerto Rico.

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