What We’re Reading: Financial Regulatory Reform, April 22

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.

Compiled by Aaron Klein, Justin Schardin, and Shaun Kern

Speech before the 22nd Annual Hyman P. Minsky Conference: Building a Financial Structure for a More Stable and Equitable Economy

Remarks by Treasury Under Secretary for Domestic Finance Mary Miller

“[T]he evidence on both sides of the argument is mixed and complicated, making it hard to attribute the existence or absence of a funding cost advantage to any single factor, including a market perception of a too-big-to-fail subsidy. The bottom line is simply that it is important to acknowledge the difficulty of making these assessments and to be cautious about drawing conclusions in either direction. We will continue to carefully consider the developments and the work in this area, remaining mindful that our financial system is dynamic and that we need to remain vigilant to evolving risks. In the meantime, we must continue to work hard to reduce the risks posed by large financial companies and keep putting in place the measures to wind such companies down with minimal impact on the rest of the economy if the need arises. To the extent the largest bank holding companies enjoy any funding cost advantage based on a perceived too-big-to-fail status, these efforts should help wring it the rest of the way out of the market.” Read the full speech here.

Letter to Governor Tarullo, Comptroller Curry, and Chairman Gruenberg on “too big to fail”

By U.S. Senators Bob Corker (R-TN), Sherrod Brown (D-OH), David Vitter (R-LA), Elizabeth Warren (D-MA), and Susan Collins (R-ME)

“We understand that the financial regulators have had a daunting task in promulgating and finalizing the numerous regulatory provisions required by Dodd-Frank. Given the many demands on your time and resources, some prioritization is obviously necessary. As such, we ask that you move expeditiously in these two areas, given continued public concern over the dangers that large financial institutions pose to our banking system and to the overall economy. By acting to substantially strengthen capital requirements and to ensure that future losses of a large bank failure will be absorbed by its shareholders and unsecured creditors, you will further your statutory mandate to protect the public against financial instability and go a long way toward ending too-big-to-fail.” Read the full letter here.

Analysis of the Nominations Process for Financial Regulators

By BPC Financial Regulatory Reform Initiative

“Four key findings emerged from analysis of the data: 1) It takes much longer for the president to nominate, and for the Senate to resolve, heads of single-director agencies than the time involved for commission members and for chairs of commissions. 2) Commission chairs take much less time to nominate than do commission members who are not chairs. The Senate takes a similar amount of time to consider both. 3) The nomination process has slowed down in the Obama administration compared with the George W. Bush administration. This delay is evident in the increase in both the time it has taken for the Obama administration to nominate individuals and in the time it has taken the Senate to act on nominations. 4) Presidents take longer to nominate individuals to commissions and single-head agencies than the Senate takes to resolve those nominations. Interestingly, this is not the case for commission chairs. There is much greater variation in the amount of time it takes the president to decide on nominations than for the Senate to resolve them.” See the full report here.

Speech Before the U.S. Chamber of Commerce Seventh Annual Capital Markets Summit

Remarks by CFTC Chairman Gary Gensler

“I believe it’s critical that Dodd-Frank swaps reform applies to transactions entered into by branches of U.S. institutions offshore, between guaranteed affiliates offshore, and for hedge funds that are incorporated offshore but operate in the U.S. Where there are comparable and comprehensive home country rules abroad, we can look to substituted compliance, but the transactions would still be covered. If we fail to provide common-sense oversight to offshore affiliates of U.S. entities, American jobs and markets may move offshore, but, particularly in times of crisis, risk would come crashing back to our economy and could affect your businesses all over again.” Read the full speech here.

Communication in Monetary Policy

Remarks by Federal Reserve Vice Chairman Janet Yellen

“The situation in 2008 and 2009 was like nothing the Federal Reserve had faced since the 1930s. In late 2008, the FOMC cut the federal funds rate nearly to zero–essentially, as low as it could go–where it has remained. With its traditional tool for expansionary monetary policy–lowering the federal funds rate–off the table, the FOMC turned to unconventional and, in some cases, newly invented policy options to try both to help stabilize the financial system and to arrest the plunge in economic activity. The public had grown accustomed to monetary policy that focused on changes to the federal funds rate target, with occasional, and at this point fairly limited, guidance that a particular policy stance would probably last for a while. Beyond the task of describing the new policies, extensive new communication was needed to justify these unconventional policy actions and convincingly connect them to the Federal Reserve’s employment and inflation objectives.” Read the entire speech here.

Basel III Capital: A Well-Intended Illusion

Remarks by FDIC Vice Chairman Thomas Hoenig

“Finally, we should not accept even comforting errors of logic which suggest that Basel III requirements will create stronger capital than those of Basel II, which failed. Instead, past industry performance and mounting academic and other evidence suggest that we would be best served to focus on a strong leverage ratio standard in judging a firm and the industry’s financial strength. No bank capital program is perfect. Our responsibility as regulators and deposit insurers is to choose the best available measure that will contribute to financial stability.” Read the full speech here.

Regulation of Cross-Border OTC Derivatives Activities: Finding the Middle Ground

Remarks by SEC Commissioner and Former SEC Chairman Elisse Walter

“In short, subjecting every OTC derivatives transaction that touches the United States in some way to all aspects of U.S. law – that is, the ‘all-in’ approach – ignores the realities of the global marketplace. And yet, treating clearly different regimes as equivalent across all key policy areas risks will create regulatory gaps, regulatory arbitrage, and a potential regulatory race to the bottom. I believe that there is, in fact, a middle ground. The Commission has not yet, as a body, proposed the specifics of its approach. But I personally support an approach that would permit a foreign market participant to comply with requirements imposed by its home country that are comparable with U.S. regulation, so long as it abides by U.S. requirements in areas where the home country’s regulations are not comparable. I call this approach ‘substituted compliance.’” Read the speech here.

Why Taxpayers May Now be Off the Hook when a Big Bank Fails

By Former FDIC Chairman Sheila Bair

“Is ‘too big to fail’ over? Believe it or not, it just might be. Even though the Dodd-Frank financial reform law banned future taxpayer bailouts of banks, the public remains skeptical. Given the size and complexity of the largest banks, it is difficult to imagine how the government could run them through an orderly bankruptcy process. Even if the regulators had the political will to do so, how could they possibly avoid systemic disruptions? Here’s how.” Read the full article here.

The Global Policy Actions Needed to Stay Ahead of the Crisis

Remarks by IMF Managing Director Christine Lagarde

“Let me emphasize that, in present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative. We know that inflation expectations are well anchored today, giving central banks greater leeway to support growth.… But experience also tells us that this can have unintended consequences. Low interest rates push people to take on more risk—some of which justified, some of which not.” Read the full speech here.

Life Insurers as SIFIs: A Case of Mistaken Identity?

Remarks by Steven Kandarian, President and CEO of MetLife, Inc.

“Should MetLife keep systemic risk regulators up at night? Should any traditional life insurance company? I hope my remarks today will help answer those questions. I plan to make three main points. First, the life insurance business did not cause the crisis. Second, imposing bank-centric regulations on certain life insurance companies – however well-intentioned the purpose – would negatively affect the availability and affordability of financial protection for consumers. And third, there is a better way for the federal government to regulate potentially systemic activities in the life insurance sector than by naming just a handful of companies as Systemically Important Financial Institutions, or SIFIs.” Read the full speech here.

Banks and Insurance Companies Are Different Animals

By Aaron Klein, Director of the BPC’s Financial Regulatory Reform Initiative

“Banks and insurance companies bear no more similarities than chickens and cows. They rely on fundamentally different business models with different balance sheets and revenue streams, meet different customers’ needs, have different legal and regulatory structures, and interact with each other and with the financial system in entirely different ways. Banks transfer timing risk; they allow depositors to have instant access to their funds, while making longer-term loans to consumers and businesses. Insurance companies, on the other hand, accumulate and pool risk. They allow people to transfer the financial risk of getting into a car accident, losing a loved one, or outliving their assets to a broad risk pool. Most of us who purchase insurance would be happy never to have to make a claim.” See the article here.

Analyzing the Impact of Bank Capital and Liquidity Regulations on US Economic Growth

By Oxford Economics, a report prepared for The Clearing House Association

“Overall, our results highlight the uncertainty around the potential macroeconomic effects of regulatory reform proposals for banks, and illustrate the need for such proposals to be carefully structured and calibrated to prevent unnecessary damage to economic growth.” To read the full report, click here.

Stability of the Financial System: Illusion or Feasible Concept?

By Bank of England Deputy Governor Paul Tucker

(Chapter 8: Competition, the pressure for Return, and Stability) “First and foremost, we need holders of bank debt to be exposed to losses. This is not some macho thing. Leverage is especially hazardous to the economy and society if the debt holders are not exposed to loss from risk. If banks’ cost of debt finance does not vary properly with the risks they are taking, an important check on the tendency to excess is badly diluted.” Read the entire chapter here.

New Era for British Financial Regulators is About to Begin

By Mark Scott, The New York Times’ DealBook

“As part of the overhaul, the Financial Services Authority’s banking supervision and consumer protection divisions will be split into separate regulators. By dividing the work between the Financial Conduct Authority and the Prudential Regulatory Authority, British officials are acknowledging that regulators became overstretched.” See the article here.