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What We're Reading in Financial Regulatory Reform, August 11

Happy Play in the Sand Day (really)! During the past two weeks, several pieces analyzing whether large banks have a cost of funding advantage have been released. We hope you enjoy the following selection of readings and videos on that subject and a few others that caught our attention. 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 Bipartisan Policy Center. Have a great August and enjoy the potential vacation reading material.

BPC’s Financial Regulatory Reform Initiative highlights news articles, papers and other important work which illuminate current and new thinking within financial regulation. We circulate these articles to provide a full view of cutting edge ideas, reactions and positions.

Compiled by Aaron Klein, Peter Ryan, Justin Schardin 

“Large Bank Holding Companies: Expectations of Government Support”
By the Government Accountability Office (GAO)

“All 42 models found that larger bank holding companies had lower bond funding costs than smaller ones in 2008 and 2009, while more than half of the models found that larger bank holding companies had higher bond funding costs than smaller ones in 2011 through 2013, given the average level of credit risk each year.” Read the report here.

Letter from the Department of the Treasury to the Government Accountability Office
By Mary J. Miller, Under Secretary for Domestic Finance, U.S. Department of the Treasury

“… the results of GAO’s analysis are noteworthy: While large bank holding companies had clear funding costs advantages during the 2007-2009 financial crisis, these advantages had declined or reversed by 2013… We believe that these results reflect increased market recognition of what should now be evident – Dodd-Frank ended ‘too-big-to-fail’ as a matter of law.” Read the letter (in the appendix of the GAO report) here.

“U.S. Banks: Government Support is Fading but not Gone – Yet”
By Rodrigo Quintanilla, Primary Credit Analyst, Standard & Poor’s Ratings Services

“U.S. government support for bailing out systemically important banks (SIBs) shown in the past is waning, particularly for bank holding companies. Policymakers and legislators are doing as much as possible to avoid a repeat of the bailouts of large financial institutions that occurred in 2008 and 2009. … However, we continue to believe that the authorities will pursue a resolution framework that seeks to avoid the default on senior obligations of core and highly strategic operating subsidiaries of systemically important institutions, and the associated financial instability that could result as a consequence.” Read the report here.

“When Measuring Big Banks’ Subsidy, First Count the Costs,” op-ed in American Banker
By Aaron Klein and Peter Ryan

“Estimates of a funding advantage for large banks need to take into account the full measure of the post-Dodd-Frank legislative and regulatory response. Studies need to account for the impact of all the policy changes put in place after the crisis, as well as the regulatory regime that goes with them. With that broader view, hopefully the debate can shift back towards a conversation about the hard work of making financial reform more effective, boosting economic growth and protecting consumers.” Read the article here.

“The Regulatory Price-Tag: Cost Implications of Post-Crisis Regulatory Reform”
By Federal Financial Analytics

“This paper analyzes critical U.S. reforms in the wake of the 2008 financial crisis to assess the extent to which their dollar cost can be reliably ascertained for the very largest U.S. banking organizations at the end of 2013 and, then, to compare the cost of relevant rules to those in effect as the crisis began at the end of 2007. … We conclude that the current cost of those portions of the regulatory framework that can be reasonably quantified is $70.2 billion as of the end of 2013. This represents an increase of $35.5 billion from year-end 2007, an increase of 102 percent.” Read the report here.

“Consumer Financial Protection Bureau: Opportunity Exists to Improve Transparency of Civil Penalty Fund Activities”
By the Government Accountability Office

“[The Consumer Financial Protection Bureau] CFPB did not document the factors the Fund Administrator considered in determining the allocation of funds for consumer education and financial literacy programs for the first allocation period. Federal internal control standards state that it is important to document significant events clearly and completely and to promptly record transactions and other significant events. Documenting the specific factors the Fund Administrator considers each time funds are allocated would make such decisions more transparent and would help to ensure that future allocation decisions are made in a consistent manner.” Read the report here.

Report on the Economic Well-being of U.S. Households in 2013
By the Board of Governors of the Federal Reserve System

“The findings in this survey highlight that economic challenges remain for a significant portion of the population. A slight majority of respondents—55 percent—reported saving money in the preceding year. Many report having little financial cushion. A minority of respondents reported having a rainy day fund, and only 56 percent said they could find any way to cover expenses were they to lose their main source of income for three months. Just over one-third reported that they are worse off financially than they were five years ago. Almost half of respondents reported having given little or no thought to retirement savings, and of those who have, many either do not plan to retire, expect to keep working into retirement to pay for expenses, or do not know how they will pay for their retirement. Nearly a third had no retirement savings whatsoever.” Read the report here.

“Delinquent Debt in America,” An Opportunity and Ownership Initiative Brief by the Urban Institute
By Caroline Ratcliffe, Signe-Mary McKernan, Brett Theodos, and Emma Kalish of the Urban Institute, and John Chalekian, Peifang Guo, and Christopher Trepel of the Consumer Credit Research Institute, Encore Capital Group

“Financial distress is a daily challenge for millions of American consumers. Nearly 12 million adults—5.3 percent of Americans with a credit file—have non-mortgage debt reported past due, and they need to pay $2,258 on average to become current on that debt. Further, an alarming 77 million Americans—35 percent of adults with credit files—have debt in collections reported in their credit files, with an average debt amount of nearly $5,178.” Read the report here.

Statement Before the Committee on Banking, Housing, and Urban Affairs on “The Role of Regulation in Shaping Equity Market Structure and Electronic Trading”
By David Lauer, President and Managing Partner, KOR Group LLC

“The issues that I will address in the written portion of my testimony aim to broaden the way that we collectively perceive the challenges of reforming market structure. The ideas expressed here are informed by the Complexity and Systems Theory, which recognize the interconnected nature of systemic failure and which consequently calls for a reconsideration of our current top-down approach to regulation. This calls for a strategy of addressing system-wide flaws, misaligned incentives and improper transparency/disclosure, rather than reacting to each technology failure with an endless sequence of fixes. Complex systems are not susceptible to ordinary cause-and-effect analysis, and each attempt to impose this type of analysis will mislead regulators into a false sense of security over having solved the most recent problem.” Read the statement here.

OFR Working Paper: “An Agent-based Model for Financial Vulnerability”
By Rick Bookstaber, Office of Financial Research, Mark Paddrik, Office of Financial Research, and Brian Tivnan, MITRE Corporation

“The model demonstrates that it is the reaction to initial losses rather than the losses themselves that determine the extent of a crisis. By building on a detailed mapping of the transformations and dynamics of the financial system, the agent-based model provides an avenue toward risk management that can illuminate the pathways for the propagation of key crisis dynamics such as fire sales and funding runs.” Read the paper here.

“How the Federal Reserve Became the De Facto Federal Insurance Regulator”
By Peter Ryan

“The Federal Reserve currently supervises and regulates close to one-fifth of the insurance industry based on assets. If MetLife is designated, that figure will rise to well over a quarter of the industry. … There are a number of important implications of this development. Most obviously, the Fed is rapidly emerging as the de-facto federal insurance regulator, transforming what was until just a few years ago an exclusively state-based regulatory system. This raises important questions about what role state regulators will have in this new system. … It also begs the question of whether an agency with a long history as a prudential banking regulator will be able to adapt to regulating the business of insurance, which is fundamentally different from the business of banking.” Read the blog post here.

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