We hope you enjoy our latest selection of readings from the financial regulatory world this Presidents’ Day and Valentine’s Day 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 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.
On February 4, the Financial Stability Oversight Council (FSOC) formally adopted several new measures designed to strengthen both its process for evaluating and potentially designating financial institutions as systemically important (SIFIs) and improve its communication with firms under consideration for designation and the general public. The FSOC issued a press release announcing those changes and updated its frequently asked questions document on the designation process.
“The measures approved on Wednesday result from a months-long review process in which FSOC engaged internally and externally with various stakeholders, including the Bipartisan Policy Center (BPC). BPC applauds FSOC for responding to valid criticisms and adopting these much-needed reforms. Nonetheless, we believe that FSOC still has more work to do in order to better address its core missions of improving coordination among regulators and focusing on potential threats to financial stability.”
Supplementary Procedures Relating to Nonbank Financial Company Determinations
By the Financial Stability Oversight Council (FSOC)
“The procedures described below supplement the Rule and Guidance and are organized into three categories: engagement during evaluations for potential determinations; engagement during annual reevaluations of determinations and transparency to the public.” Read the document here.
On February 6, the Financial Stability Board (FSB) released public responses to its November 2014 consultative document entitled the Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution. This week, BPC summarized some of the key comment letters submitted to the FSB.
What’s the Best Way to Resolve a Global Bank? A Review of Comment Letters on Total Loss Absorbing Capacity (TLAC)
By Peter Ryan, Senior Policy Analyst, Financial Regulatory Reform Initiative
“Since the fall, the FSB received comment letters from at least 50 stakeholders – ranging from industry representatives to financial reform advocates – on the TLAC plan. The responses largely welcomed the TLAC proposal as a key piece of the puzzle in ending the ‘too-big-to-fail’ problem. However, many stakeholders expressed concerns that parts of the proposed TLAC framework could undermine effective cross-border resolution, lead to competitive inequities, were insufficiently transparent to investors, and could have adverse impacts on the real-economy. Below is a brief summary of many of the key comment letters grouped by their responses to several high profile issues. You may find areas of expected disagreement, expected agreement, and some unexpected agreement.” Read the blog post here.
“Audit the Fed’ and Other Proposals,” remarks at the Catholic University of America, Columbus School of Law, Washington, DC
By Jerome H. Powell, Governor, Board of Governors of the Federal Reserve System
“The Federal Reserve, like other parts of our democratic system of government, must be accountable to the public and its elected representatives. Given the scale of the Fed’s actions during the Crisis, it has been not only appropriate but essential that these actions be transparent to the public and subject to close and careful scrutiny by the Congress. And that is exactly what happened. So it is jarring to hear it asserted that the Fed carries out its duties in secret and is unaccountable to the public and its elected representatives. The Federal Reserve is highly transparent and accountable to the public and to the Congress.” Read the speech here.
Letter to bank executives regarding swaps trading practices
By Senator Elizabeth Warren (D-MA) and Representative Elijah E. Cummings (D-MD)
“We are writing today to request information about how your institution will alter its swaps trading practices in response to the passage of Section 630 of the 2015 Consolidated and Further Continuing Appropriations Act, which gutted Section 716 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.” Read the letter here.
“Advancing Macroprudential Policy Objectives,” remarks at the Office of Financial Research and Financial Stability Oversight Council’s 4th Annual Conference on Evaluating Macroprudential Tools: Complementarities and Conflicts, Arlington, Virginia
By Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System
“Today I would like to suggest some specific macroprudential objectives that I regard as both realistic and important to incorporate into a near- to medium-term policy agenda: first, continuing the task of ensuring that very large, complex financial institutions do not threaten financial stability; second, developing policies to deal with leverage risks and susceptibility to runs in financial markets that are not fully contained within the universe of prudentially regulated firms; and third, dealing with the vulnerabilities associated with the growing importance of central counterparties.” Read the speech here.
“You might have thought that one lesson from the crisis is that central banks acting as a lender of last resort was an important and powerful part of the response. Yet, the general thrust of Dodd-Frank is to make it harder to use the lender of last resort function for nonbanks like broker-dealer firms – namely, to make it more difficult to invoke Federal Reserve Act Section 13(3) powers in ‘unusual and exigent circumstances’ for a specific firm. I think it’s an open question whether that’s a useful direction to go. I might lean against that a little bit: if you have the ability to regulate broker-dealers effectively, and you can regulate them as stringently as a bank, then you might want to have the ability to make the Federal Reserve’s lender of last resort capabilities available to them as well.” Read the interview here.
“Cyber Security and Financial Stability,” remarks at forum on “Strengthening Financial Sector Supervision and Current Regulatory Priorities” organized by the Basel Committee on Banking Supervision and the Financial Stability Institute, Cape Town, South Africa
By Eric S. Rosengren, President and CEO, Federal Reserve Bank of Boston
“Cyber security is a serious financial stability concern. The potential for loss of trust in payment systems due to incursions or disruption is a key consideration. … In general, central banks need to focus on how best to address this emerging concern and play a proactive role in assuring the cyber resiliency of payment systems. Given privacy and secrecy concerns, open communication of threats and mitigants is often problematic. And as I discussed today, the rapid technological evolution of payment systems has resulted in a highly fragmented and diffuse regulatory framework. There are serious challenges and obstacles to comprehensive solutions. Central banks are essential to this discussion and to the progress that needs to be made. And given the importance of a safe and available payment system to the functioning of a nation’s economy, investment in core aspects of systems to ensure they are as secure and cyber resilient as possible must be a national priority.” Read the speech here.
Range of Practice in the Regulation and Supervision of Institutions Relevant to Financial Inclusion
By the Basel Committee on Banking Supervision
“Digital transactional platforms combine elements of a payments instrument with the capacity to store value for future use and can offer poor and low-income customers an affordable alternative to traditional transactional banking – an alternative that is generally suitable to their typically small and unpredictable income stream. These platforms are sometimes used alongside a core processing system, reducing the costs of serving poor and low-income customers. In an increasing number of jurisdictions, additional products –including interest-bearing savings, consumer credit, insurance products and even investment products – are being offered via digital transactional platforms. Regulation and supervision of these activities and institutions often involve prudential supervisors, as well as telecommunications authorities and agencies such as data protection, competition and consumer protection authorities. The survey results address many of these issues.” Read the report here.
Inside the FDIC: Thirty Years of Bank Failures, Bailouts and Regulatory Battles
By John F. Bovenzi, Member, Financial Regulatory Reform Initiative’s Failure Resolution Task Force and Partner, Oliver Wyman
“This book provides a different view of the FDIC and other bank regulators. Readers will see: how an agency that had become almost invisible would emerge as a major and highly independent force impacting U.S. financial markets; how 10 FDIC chairmen helped shape the FDIC and the U.S. financial regulatory system; how conflicts between the FDIC and other financial regulatory agencies unfolded amid the pressures and challenges associated with bank failures and financial crises.” The book is available for purchase here.
The State and Fate of Community Banking
By Marshall Lux, Senior Fellow; and Robert Greene, Research Assistant, Mossavar-Rahmani Center for Business and Government, John F. Kennedy School of Government, Harvard University
“This working paper focuses on the plight of community banks in the United States. … [C]ommunity banks’ share of U.S. banking assets and lending markets has fallen from over 40 percent in 1994 to around 20 percent today. Interestingly, we find that community banks emerged from the financial crisis with a market share 6 percent lower, but since the second quarter of 2010 – around the time of the passage of the Dodd-Frank Act – their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010. Particularly troubling is community banks’ declining market share in several key lending markets, their decline in small business lending volume, and the disproportionate losses being realized by particularly small community banks. We review studies on the impact of regulation, consumer trends and other factors on community banks, and examine the consequences of consolidation on U.S. lending markets.” Read the paper here.
Virtual Currencies & Federal Law
By Julie Andersen Hill, University of Alabama – School of Law
“The rise of virtual currencies, like many innovations, poses legal questions. Most existing laws do not contemplate the existence of virtual currencies. Can existing U.S. criminal law, tax law, banking law, securities law and consumer protection law nevertheless be applied to virtual currencies? This article provides an update on federal regulators’ recent attempts to tackle these questions. Because virtual currencies are new, the law is still developing. There are unanswered questions and the current answers are subject to change. Nevertheless, we must start somewhere.” Read the paper here.