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What We're Reading in Financial Regulatory Reform, August 29

Happy Labor Day weekend! We hope you enjoy the following selection of readings. 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.

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 KleinPeter Ryan and Justin Schardin.

Asset-Backed Securities Registration and Disclosure Rules
By the U.S. Securities and Exchange Commission

“The new rules, among other things, require loan-level disclosure for certain assets, such as residential and commercial mortgages and automobile loans. The rules also provide more time for investors to review and consider a securitization offering, revise the eligibility criteria for using an expedited offering process known as ‘shelf offerings,’ and make important revisions to reporting requirements.” Read the fact sheet on the new rules here and the draft final rule here.

Credit Rating Agency Reforms Rules
By the U.S. Securities and Exchange Commission

“The new requirements for[Nationally Recognized Statistical Rating Organizations] NRSROs address internal controls, conflicts of interest, disclosure of credit rating performance statistics, procedures to protect the integrity and transparency of rating methodologies, disclosures to promote the transparency of credit ratings, and standards for training, experience, and competence of credit analysts. The requirements provide for an annual certification by the CEO as to the effectiveness of internal controls and additional certifications to accompany credit ratings attesting that the rating was not influenced by other business activities.” Read the fact sheet on the new rules here.

“The Great Recession: Moving Ahead.” Speech at the Swedish Ministry of Finance, Stockholm, Sweden
By Stanley Fischer, Vice Chairman, Board of Governors of the Federal Reserve System

“Considerable progress has been made in strengthening bank capital and liquidity; in improving the quality and effectiveness of prudential regulation and supervision; in developing suitable resolution regimes for financial institutions; and in strengthening the infrastructure for the clearing and trading of derivative contracts. It is clear that further progress is needed with respect to goals 6-9, relating respectively to: improving compensation practices; strengthening international coordination, especially with regard to the resolution and regulation of [global systemically important financial institutions] G-SIFIs; finding ways of dealing with the shadow banking system; and improving the quality of credit rating agencies.” Read the speech here.

Remarks at Workshop on the Risks of Wholesale Funding
By William C. Dudley, President, Federal Reserve Bank of New York

“Much has been done over the past few years to mitigate the structural flaws that make wholesale funding a point of weakness in the global financial system. The New York Fed, for example, has led a Federal Reserve effort to make the tri-party repo system more resilient to stress, while the SEC has taken steps to address risks associated with money market mutual funds. Nonetheless, some important issues and vulnerabilities remain. Moreover, because the Dodd-Frank Act raised the hurdle for the Federal Reserve to exercise its Section 13.3 emergency lending authority, extraordinary interventions will be more difficult to undertake, perhaps causing investors to be even more skittish in the future. This is why it is essential to make the system more stable.” Read the speech here.

Constitutional Issues with SIFI Designation Process
By Morton Rosenberg, Counsel, Barnett Sivon & Natter, P.C.

“We believe that the evidence of such a prolonged lack of specificity, clarity, and concreteness in [the Financial Stability Oversight Council’s] FSOC’s administrative development of the [Dodd-Frank Act] DFA is a symptom of a more fundamental and intractable problem: the lack of meaningful standards for SIFI designations in the DFA itself, a defect that cannot be resolved by the FSOC alone. A strong and persuasive argument may be made that the DFA’s regulatory scheme for SIFIs is an unconstitutional delegation of unconstrained legislative authority to the Council and a failure to provide adequate due process protections for targeted nonbank companies.” Read the memorandum here.

“Labor Market Dynamic and Monetary Policy.” Speech at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming
By Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System

“I believe that our assessments of the degree of slack must be based on a wide range of variables and will require difficult judgments about the cyclical and structural influences in the labor market. While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession, which brought nearly unprecedented cyclical dislocations and may have been associated with similarly unprecedented structural changes in the labor market–changes that have yet to be fully understood.” Read the speech here.

“The Evolution of Rotation Group Bias: Will the Real Unemployment Rate Please Stand Up?”
By Alan Krueger and Alexandre Mas, Princeton University, and Xiaotong Niu, Congressional Budget Office

“This paper documents that rotation group bias — the tendency for labor force statistics to vary systematically by month in sample in labor force surveys — in the Current Population Survey (CPS) has worsened considerably overtime. The estimated unemployment rate for earlier rotation groups has grown sharply relative to the unemployment rate for later rotation groups; both should be nationally representative samples. The rise in rotation group bias is driven by a growing tendency for respondents to report job search in earlier rotations relative to later rotations. We investigate explanations for the change in bias.” Read the paper here.

“The Capitol Since the Nineteenth Century: Political Polarization and Income Inequality in the United States”
By Rajashri Chakrabarti and Matt Mazewski, Federal Reserve Bank of New York

“Another possible channel by which polarization might drive inequality involves financial regulation. Asymmetric polarization associated with a shift of the political center of gravity to the right can lead to lighter regulation of finance, which in turn may lead to rising incomes for individuals in the upper tail of the income distribution.” Read the full blog post here.

“The Case for User Fees.” Speech at the 38th Annual Southwest Securities Conference, Dallas, Texas
By Rick A. Fleming, Investor Advocate, U.S. Securities and Exchange Commission

“To some, the idea of a ‘user fee’ sounds a lot like a tax. But several industry associations that represent investment advisers have actually endorsed the concept of user fees. They recognize that a rogue adviser not only harms investors, but also leaves a stain on the advisory industry, so they support an increased regulatory presence and are willing to pay for it. Let me repeat that – they are willing to pay more money to the SEC so that it can conduct more examinations of advisers.” Read the speech here.

“Gates, Fees, and Preemptive Runs”
By Marco Cipriani, Antoine Martin, Patrick McCabe, and Bruno M. Parigi, Federal Reserve Bank of New York

“In July 2014, the Securities and Exchange Commission adopted rules that are intended to reduce the likelihood of runs on money market funds (MMFs) by giving the funds’ boards the option to halt (or ‘gate’) redemptions or to charge fees for redemptions when liquidity runs short, actions analogous to suspending the convertibility of deposits into cash at par. Our results show that the option to suspend convertibility has important drawbacks: A bank, MMF, or other [financial intermediary] FI with the option to suspend convertibility may become more fragile and vulnerable to runs. In other words, we show that instead of offering a solution, policies relying on gates and fees can be part of the problem.” Read the blog post here.

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