BPC’s Financial Regulatory Reform Initiative regularly 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. 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 Memorial Day weekend. As you enjoy the holiday and time with your family and friends, here are a few financial reform highlights, including BPC’s first white paper addressing whether the resolution process established in Dodd-Frank is working to solve the ‘too big to fail’ problem.
By the Failure Resolution Task Force of the Financial Regulatory Reform Initiative of the Bipartisan Policy Center
“This report concludes that the FDIC’s single-point-of-entry (SPOE) recapitalization strategy, whether carried out under OLA or the Bankruptcy Code, should succeed in solving a critical part of the too-big-to-fail problem, by allowing any SIFI to fail without resorting to taxpayer-funded bailouts or a collapse of the financial system, if the recommendations contained in this report are implemented. With SPOE recap as an option, we do not believe that government officials would have the temerity to select bailout, especially since the statute expressly prohibits that choice. Among other things, the SPOE recapitalization strategy eliminates virtually all of the material impediments to a cross-border resolution of a G-SIFI by keeping the group’s domestic and foreign operating subsidiaries, including their foreign branches, out of resolution or other insolvency proceedings. The remaining impediments appear relatively minor and reasonably manageable with advanced planning by the FDIC or SIFIs themselves. Thus, we can solve the “to fail” portion of too-big-to-fail, which in our opinion solves the entire problem.” Read the full report here.
By FDIC Chairman Martin Gruenberg
“The banking industry has now had a sustained recovery over the past three years and there is reason to believe it will continue. We believe that the community banking model remains quite viable and there will be a strong community banking sector in the U.S. financial system for the foreseeable future. And finally, there has been substantial and meaningful progress on the international arena both on the understanding of resolution issues and establishing a framework for cross border coordination.” Read full remarks here.
By Bank of England’s Deputy Governor Financial Stability Paul Tucker
“In short, there is no alternative to submitting banking and its investors to the disciplines of capitalism – failure as well as success. We cannot afford to have banking, so central to the allocation of capital in market economies, semi socialised. Moreover, we need to harness the energies of bond holders to monitoring and helping to contain the tendency to excess characteristic of bankers, over the generations, in the upswing of the credit cycle. That is not in and of itself a guarantee of stability, but I would rather give asset managers incentives to help the objectives of prudential supervisors than incentives to rely on a fiscal backstop.” Read full speech here.
By Mike Konczal, Washington Post
“I think bondholders are starting to wake up to the idea that their money is at risk and that they could take losses, which will result in greater market discipline. If you convince the market TBTF is over, debt spreads will go up for large institutions. And you are seeing that happen a bit already. There’s a lot of work left to be done, but so far I’d give implementation a pretty good grade.” Read full interview here.
By House Financial Services Committee Majority Staff
“Title II of the Dodd-Frank Act contains provisions to facilitate the orderly resolution of a systemically significant bank or nonbank financial institution. In an orderly liquidation proceeding under Title II, the Federal Deposit Insurance Corporation (FDIC) acts as the receiver for a systemically significant financial institution, following a determination by the Treasury Secretary and a written recommendation of the FDIC’s board of directors and the Federal Reserve Board of Governors that the financial institution is in default or danger of default and that the failure of the institution would have serious adverse effects on the financial stability of the United States.” Read the full memo here.
By Financial Stability Oversight Council
“Since the Council’s last annual report, the U.S. financial system has continued to strengthen, with increased capital and liquidity levels for core financial institutions and further improvements in financial market infrastructure. Market discipline has provided a tailwind for regulatory efforts to promote the conduct of financial transactions in a transparent and standardized fashion, particularly when compared to the opaque securitization techniques used in the run-up to the financial crisis. Investor confidence has also risen, as seen in further improvements of equity, fixed income, and housing markets. In addition, implementation of the Dodd-Frank Act and international coordination on G-20 reform priorities have brought significant progress towards establishing a more resilient and stable financial system, both domestically and globally. Despite these positive developments, significant risks to the financial stability of the United States remain.” See the full report here.
By Treasury Secretary and FSOC Chairman Jack Lew
“[I]mportant work remains to complete the implementation of financial reform. The Council, its members, and its member agencies will continue to strengthen coordination of financial regulation both domestically and internationally. In developing and implementing the international financial regulatory reform agenda, the Council members support the development of policies that promote a level playing field, mitigate regulatory arbitrage, and address regulatory gaps primarily through members’ engagement with the G-20 and the Financial Stability Board (FSB). In particular, the Council is focused on: Strengthening the regulation of large, complex financial institutions… Developing an international framework to resolve global financial institutions… Increasing the transparency and regulation of over-the-counter (OTC) derivatives…” Read the full testimony here.
By Senate Banking Subcommittee on Securities, Insurance, and Investment Chairman Jon Tester (D-MT) and Ranking Member Mike Johanns (R-NE)
“We strongly support the efforts of the Council to differentiate among industries and to publish industry-specific guidance and metrics that it devises. We believe that this is appropriate given the distinct differences between the banking business model, on which the SIFI designation authority and regulatory scheme are based, and the business models of other financial services industries such as asset management or insurance.” Read the full letter here.
Remarks by SEC Chairman Mary Jo White
“A defining fact of life at the SEC today is that we are not alone in the global regulatory space. And our duty to the investors, entrepreneurs, and other market participants who rely on us means that we must find common ground with our counterparts abroad, collaborate on everyday matters like enforcement and accounting, and knit together a regulatory network that offers protection, consistency, and stability to market participants – especially in the United States but abroad as well. This global reality was quickly and forcefully driven home to me almost from the moment I was sworn in on April 10.” Read the full speech here.
By Former SEC Commissioner Roel Campos
“Since I left the Securities and Exchange Commission in 2007, many important steps have been taken to improve the quality of credit ratings and to increase the accountability, transparency and oversight of rating firms, which play an important role in the financial system…But in speaking with investors and other market participants about ratings, it is clear that there are still three principal concerns that need to be addressed and that an SEC Roundtable will discuss on Tuesday. First, how best to reduce “ratings shopping” (soliciting multiple rating agencies for the most favorable rating) in the structured finance markets; second, how to increase competition beyond the Big Three rating organizations — Fitch, Moody’s and Standard & Poor’s — and third, how to clarify the use of ratings and eliminate government mandates.” See the full opinion here.
By CFTC Commissioner Scott O’Malia
“So, what questions should the Commission answer to provide regulatory certainty to the market and to accomplish Dodd-Frank objectives? First and foremost, to be able to effectively conduct its market oversight mission, it should be able to understand and analyze swaps data. Second, the Commission must fix broken rules and not wait for market participants to drag us into litigation. And last but not least, the Commission must ensure that its rules, while implementing the congressional mandate to regulate the derivatives markets, do not harm this country’s vital economic forces: the manufacturers, energy companies, real estate developers, and other businesses that provide important services to the American people.” Read the full speech here.
By Jesse Eisinger, New York Times DealBook
“It’s impressive that the Fed and many economists have successfully predicted the path of interest rates and inflation in the wake of the worst financial crisis in a generation. But neither the central bank nor academicians managed to predict or prevent the crisis in the first place. The failure dwarfs the accomplishment.” Read the full article here.