What We're Reading in Financial Regulatory Reform, December 23

As this year nears a close, we hope that you enjoy some time to read and reflect. We find this most recent work to be particularly interesting. From all of us at the BPC’s Financial Regulatory Reform Initiative (FRRI), we wish you a Happy New Year.

FRRI regularly highlights news articles, papers, and other important work which illuminates 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

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The Volcker Rule: Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships With, Hedge Funds and Private Equity Funds
By the Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission

“The Agencies made numerous changes to the final rule in response to the issues and information provided by commenters.” Read the full Volcker Rule here. Read the CFTC’s Final Volcker Rule here.

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A Modest Volcker Rule
By FRRI Co-chair Phillip Swagel

“In putting out the rule, the federal regulators stated that they would collect and analyze data relating to firms’ trading activities, and make adjustments in response. This data-driven approach featuring flexibility and a staged implementation matches the recommendations of a report from the Bipartisan Policy Center’s Financial Regulatory Reform Initiative.” Read the full New York Times piece here.

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FDIC’s Request for Comments on the Resolution of Systemically Important Financial Institutions: The Single Point of Entry (SPOE) Strategy
By the Federal Deposit Insurance Corporation

“To implement its authority under Title II, the FDIC is developing the SPOE strategy. In developing and refining this strategy to this point, the FDIC has engaged with numerous stakeholders and other interested parties to describe its plans for the use of the SPOE strategy and to seek reaction. During the course of this process, a number of issues have been identified that speak to the question of how a Title II resolution strategy can be most effective in achieving the dual objectives of promoting market discipline and maintaining financial stability. The FDIC seeks public comments on these and other issues.” Read the full request for comments in the Federal Register here.

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How to Modernize and Improve the System of Insurance Regulation in the United States
By Federal Insurance Office, U.S. Treasury Department

“The limitations inherent in a state-based system of insurance regulation, however, do not necessarily imply that the ideal solution would be for the federal government to displace state regulation completely. The business of insurance involves offering many products that are tailored for and delivered at a local level. For the most part, effective delivery of the product will require local knowledge and relationships, and local regulation. Moreover, establishing a new federal agency to regulate all or part of the $7.3 trillion insurance sector would be a significant undertaking.” Read the full report here.

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Does Dodd-Frank Work for Non-Banks? Insurance as the Test Case
Hosted by the BPC’s FRRI (recent event)

“As implementation of Dodd-Frank continues, some questions remain. Does Dodd-Frank permit our financial regulatory system to effectively handle all types of financial institutions, or did it impose a bank-centric regulatory framework capable of causing major problems for non-banks? Do regulators appreciate the difference between banks and non-banks? Do they have the legal flexibility to make appropriate distinctions?

“Senators Sherrod Brown (D-OH) and Mike Johanns (R-NE) believe that Dodd-Frank may need to be changed to avoid substantial harm to non-bank entities, such as insurance companies. These two senators have introduced bipartisan legislation to address this issue. BPC hosted a Bridge-Builder Breakfast to hear their perspective and learn about their proposed solution to this problem.” See the webcast here. Their legislation, S. 1369 can be found here.

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Office of Financial Research 2013 Annual Report
By the Office of Financial Research

“Although the U.S. financial system is stronger and functioning more smoothly than it was 17 months ago, threats to financial stability remain. This report analyzes those threats. Among them are vulnerabilities in short-term, wholesale funding markets. Th e current financial environment, marked by low interest rates and low volatility, has spurred risk-taking, making markets and institutions more vulnerable to a sharp increase in interest rates, volatility, or both. Operational risks could also destabilize the “plumbing” of the financial system ? the infrastructure for payments, clearing, and settlement. In addition, uncertainty about the U.S. fiscal outlook could threaten financial markets.” Read the full report here.

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Dodd-Frank Regulations – Agencies Conducted Regulatory Analyses and Coordinated but Could Benefit from Additional Guidance on Major Rules
By the U.S. Government Accountability Office

“Federal regulators coordinated on 49 rulemakings pursuant to the Dodd-Frank Act or voluntarily. As required by the act, the Consumer Financial Protection Bureau (CFPB) established a framework to coordinate its supervision activities with prudential regulators and is establishing a similar framework to coordinate with state regulators. In May 2012, CFPB and prudential regulators entered into an agreement that specifies how they plan to meet the act’s coordination requirements for the supervision of large banks (i.e., more than $10 billion in assets). CFPB has entered into similar agreements with state regulators to coordinate examinations of banks and nonbank financial entities.” Read the full report here.

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An International Review of OCC’s Supervision of Large and Midsize Institutions: Recommendations to Improve Supervisory Effectiveness
By International Peer Group Led by Jonathan Fiechter

“In the aftermath of the financial crisis, the OCC, along with the Federal Reserve System, the FDIC, and the other federal and state financial supervisory agencies, has had to rethink its approaches to supervision and regulation. In addition, the OCC faces a number of additional challenges in the coming years. A high proportion of OCC examiners are at or near retirement age. A significant number of new rules and policies need to be put in place as a result of the Dodd?Frank Wall Street Reform and Consumer Protection Act (Dodd?Frank) and the output of international bodies such as the Basel Committee on Bank Supervision and the Financial Stability Board. The OCC also operates in a complicated environment of multiple federal and state regulatory agencies with overlapping responsibilities regarding the regulation and supervision of federally chartered depository institutions and with each agency having its own mandates and objectives.” Read the full recommendations here.

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An Unfinished Mission ? Making Wall Street Work for Us
By Americans for Financial Reform & The Roosevelt Institute

“Three years after the Dodd-Frank Act was approved, its practical implications are coming into focus. At the same time, we can see the unmet challenges of the transformation of the financial system into one that is safer, more accountable, and truly designed to serve the economy and society as a whole.” Read the full report here.

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Financial Stability Oversight Council Reform Agenda
By the U.S. Chamber of Commerce, Center for Capital Markets Competitiveness

“In the over three years since FSOC’s creation, we believe several fundamental shortcomings in the FSOC’s structure and operations have been exposed. For example, although FSOC was tasked with over a dozen assignments, including enhancing regulatory coordination, the systemic risk designation function appears to have dominated the FSOC’s agenda. The FSOC has operated without the minimally necessary due process for effective regulation often relying on brief media “readouts” after meetings. Companies facing potential designation have little clarity about the lines between reasonable and unreasonable risk taking, what steps they can take to avoid crossing the line to designation, what designation would mean if they are designated, or what steps they could take in the future to become undesignated. And, although Congress anticipated the need for the FSOC to have access to independent, rigorous data and analytical insights to inform its decision making, the Office of Financial Research (OFR) has fallen far short of functioning in this role.” Read the full report here.