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Financial Reform Must-Reads, November 24

Tuesday, November 24, 2015

We at BPC would like to thank our readers and supporters and hope that you gobble up these new reads during the holiday weekend. 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 on financial regulation

Senator Crapo urges Senate Conferees to Hold-off on Changing the Fed Dividend Rate
By Senator Mike Crapo (R-ID)

“With no debate or input from the Senate Banking Committee, the Senate version of H.R. 22 would alter the Federal Reserve dividends for the purpose of creating an offset rather than promoting public policy. … According to the Bipartisan Policy Center: ‘From the introduction of the dividend in 1913 to present, the average return on 10-year U.S. Treasuries was approximately 5 percent, just slightly under the 6 percent rate paid by the Federal Reserve. Thus, over history, the original framers of the Federal Reserve System picked an interest rate for Federal Reserve Bank capital that would turn out to be remarkably close to actual experience over the next century.’ If Congress considers a rate change, all unintended consequences and impacts to bank lending must be understood.” Read the letter.


“Remarks by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation to The Clearing House Annual Conference; New York, N.Y.”
By Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation

“If there is one point I would like to conclude with today it is that there has been a transformational change in the United States and internationally since the financial crisis in regard to the resolution of systemically important financial institutions that perhaps has been underappreciated. … The living wills are an important new tool to require institutions to address the deep interconnectedness within their own organizational structures that is a central impediment to orderly resolution under bankruptcy as well as under the Orderly Liquidation Authority. The stay on the automatic termination of financial contracts … is a major step forward. The ability to convert unsecured debt to equity to facilitate an orderly failure in bankruptcy or under the Orderly Liquidation Authority addresses another essential issue.” Read the speech.


“Thinking Critically about Nonbank Financial Intermediation,” Remarks at the Brookings Institution, Washington, D.C.
By Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System

“It is unclear that all of the statutory prudential requirements for designated firms would be necessary or appropriate in dealing with the risks to financial stability posed by the activities of these firms. In many instances … it is the activity itself that needs to be regulated in some way. … A tool that might be better targeted to actual risks, while avoiding unnecessary “bank-like” regulation would be what I have previously termed “prudential market regulation”–that is, a policy framework that builds on the traditional investor-protection and market-functioning aims of market regulation by incorporating a system-wide financial stability perspective.” Read the speech.


“Panel Remarks at The Clearing House Annual Conference”
By William C. Dudley, President and Chief Executive Officer, Federal Reserve Bank of New York

“A key next step will be for the U.S. and other major jurisdictions to put in place regulations and supervisory measures that will require non-bank counterparties of GSIBs to trade with the GSIBs on terms equivalent to those found in the ISDA resolution stay protocol. This further step is needed in order to limit the potential for arbitrage within the market and to promote greater stability in the event of a necessary resolution.” Read the speech.


“Central Clearing in an Interdependent World,” Remarks at The Clearing House Annual Conference, New York, N.Y.
By Jerome H. Powell, Governor, Board of Governors of the Federal Reserve System

“In my view, clearing should be limited to those assets that are highly liquid and expected to remain so even in severely stressed market conditions. While any model for expanded repo clearing will have to satisfy stringent regulatory requirements, regulators should be open to emerging clearing solutions where they provide substantial benefits and can meet these standards. This may be particularly true for repo trading in government and agency securities, since new regulations require financial institutions to hold such high-quality collateral under the assumption that it can be quickly converted to cash.” Read the speech.


“Reforming financial system for economic growth: Comparison of India, China and Bangladesh”
By Jamaluddin Ahmed PhD FCA, General Secretary, Bangladesh Economic Association

“Achieving these ends requires a financial system supported by three pillars: diversity, trust and openness. … A diverse financial system, with market-based as well as bank-based finance, can best support a wide variety of investment from infrastructure to SMEs that is necessary to create the jobs our citizens deserve. A trusted financial system can retain its social license to support the real economy in innovative and efficient ways. An open financial system can avoid the risk of Balkanized finance, which would reduce the efficiency with which savings are matched to investment and lead to a global misallocation of scarce capital.” Read the speech.


What we’re reading on monetary policy

Federal Reserve Chair Janet Yellen Defends Low Interest Rates in Response Letter to Ralph Nader and Guy Vidal
By Janet Yellen, Chair, Board of Governors of the Federal Reserve System

“The low returns are caused by the continuing aftermath of the financial crisis and the severe recession that followed it. Thus, the fundamental remedy for low returns to savers is a restoring the economy to prosperity so that it can support higher returns. … It remains critically important for all Americans, including savers, that monetary policy continues to foster economic expansion and stable prices. We all hope and expect that the economy will continue to expand, that the jobs market will continue to make progress, and that inflation will move toward our 2 percent price stability objective.” Read the letter.


Federal Reserve Chair Janet Yellen Urges House Leadership to Reject the FORM Act, Letter to House Majority Leader Paul Ryan and Minority Leader Nancy Pelosi
By Janet Yellen, Chair, Board of Governors of the Federal Reserve System

“The FORM Act would severely impair the Federal Reserve’s ability to carry out its congressional mandate to foster maximum employment and stable prices and would undermine our ability to implement policies that are in the best interest of American businesses and consumers. This legislation would severely damage the U.S. economy were it to become law.” Read the letter.


“Dinner Address for the Bank of England-Federal Reserve Bank of New York Conference on Money Markets and Monetary Policy Implementation”
By Simon Potter, Executive Vice President, Federal Reserve Bank of New York

“Any long-run monetary policy implementation framework should be assessed relative to goals. That assessment may be informed by recent experience. … It should also be as robust as possible to potential structural changes in the financial system. The framework should enhance our ability to achieve macroeconomic objectives at very low or even negative interest rates. Further, it might be important to consider the framework’s ability to address liquidity strains in money markets and to support overall financial stability.” Read the speech.


“Should Monetary Policy Respond to Financial Conditions?” Liberty Street Economics
By Bianca De Paoli, Senior Economist, International Research Function, Federal Reserve Bank of New York

“Theory suggests that there’s a link between the natural interest rate and people’s attitude toward risk and the data appear to support this link. So a case can be made for adjusting monetary policy according to the level of risk taking in markets to the extent that this affects the natural rate.” Read the blog post.


What we’re reading on the CFPB

“The Future of Mandatory Consumer Arbitration Clauses”
By Jones Day

“While the CFPB Proposal Outline does not contemplate a complete banning of companies subject to the CFPB’s jurisdiction from using arbitration clauses, the two proposals under consideration … will severely limit the use and benefits of arbitration clauses in contracts for consumer financial products and services, including for credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, payday loans, and private student loans. In issuing its Proposal Outline, the CFPB analyzed the effect of legal precedent upholding the validity of arbitration clauses and the availability of class-action waivers, but nevertheless concluded it has authority under the Dodd-Frank Act to issue rules limiting the scope of such clauses.” Read the commentary.


“Financial report of the Consumer Financial Protection Bureau: Fiscal year 2015”
By the Consumer Financial Protection Bureau

“As of the end of the fiscal year, the Bureau’s enforcement activity has resulted in more than $11 billion in relief for over 25 million consumers. Our supervisory actions have resulted in financial institutions providing more than $248 million in redress to nearly 2 million consumers, as well as the cessation of numerous practices that may cause consumer harm. And as of September 2015, we have handled over 700,000 complaints from consumers addressing all manner of financial products and services.” Read the report.


What we’re reading on cybersecurity

“Remarks By Deputy Secretary Sarah Bloom Raskin At The Clearing House Annual Conference,” New York, N.Y.
By Sarah Bloom Raskin, Deputy Secretary, U.S. Department of the Treasury

“So let me end with the pragmatic—namely to identify three key things that each executive in this room can do at their own institutions that collectively will make a difference. First: Ensure that cyber risk is part of your institution’s risk management framework and cybersecurity is embedded into your governance, control, and risk management systems. … Second: Engage in basic cyber hygiene, those essential practices that bolster the security and resilience of computer networks and systems. … Third: Press your institution to prepare a response and recovery playbook for significant cyber incidents.” Read the speech.


What we’re reading on payments reform

“U.S. Payment System Improvement and the Federal Reserve,” Remarks at The Clearing House Annual Conference, New York, NY
By Loretta J. Mester, President and Chief Executive Officer, Federal Reserve Bank of Cleveland

“The Faster Payments Task Force has completed and gathered public comment on a draft set of criteria that will be used to assess whether proposed alternative approaches will be effective in delivering a safe and ubiquitous faster-payments capability. These criteria fall into six categories: ubiquity, efficiency, safety, speed, legal considerations, and governance. … Many of the criteria may involve a tradeoff, for example, speed vs. safety. … Work is also progressing on defining a process for encouraging the best ideas on faster payments to come forward and for assessing proposals against the effectiveness criteria.” Read the speech.

KEYWORDS: JANET YELLEN, JEROME POWELL, MIKE CRAPO