What We're Reading: Financial Regulatory Reform, December 3

The BPC’s Financial Regulatory Reform Initiative 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, Peter Ryan, Justin Schardin, and Shaun Kern

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Ending Too Big to Fail
By Federal Reserve Bank of New York President William Dudley

“A holistic approach is needed that both provides a credible resolution process for large, complex and interconnected banks, uses enhanced prudential standards and initiatives to further reduce the probability of default and the social losses associated with a default, and that incents management to intervene early to address incipient problems before they threaten the viability of the firm. Relying solely on resolution is not sufficient. Until the Title II resolution process is used, there will remain uncertainties regarding how well this approach will work in practice—especially in a time of market stress. For this reason it is also important to continue to pursue a number of alternative approaches.” Read the full speech here.

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Government Support for Bank Holding Companies: Statutory Changes to Limit Future Support are Not Yet Fully Implemented
By U.S. Government Accountability Office (GAO)

“This is the first of two reports GAO will issue on this topic. This report examines (1) actual government support for banks and bank holding companies during the financial crisis, and (2) recent statutory and regulatory changes related to government support for banks and bank holding companies. GAO reviewed relevant statutes, regulations, and agency documents; analyzed program transaction data; and interviewed regulators, representatives of financial institutions, and academics. In a second report to be issued in 2014, GAO will examine any funding or other economic advantages the largest bank holding companies have received as a result of implied government support.” See the full report here.

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Working Paper Series on the Value of Large Banks. Working Paper No. 1: Identifying the Right Question
By The Clearing House

“Proposals that would directly or indirectly “break up” large banks based on their size fail to consider the crucial and complex role of large banks in supporting the economy and instead resemble “industrial policy” of the kind long rejected in our system. Instead, the analysis must be founded on a meaningful understanding of what large banks do, why they need to be large to do those things efficiently, and how these institutions are vital to the overall economic system. Any economic or competitive benefits enjoyed by large banks because of unfair government support must be distinguished from those advantages arising from other appropriate market factors. Moreover, the analysis must consider the extent to which large banks are distinctly disadvantaged by specific government policies that may offset any relative advantages they enjoy from unfair explicit or implicit forms of government support.” Read the full working paper here.

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A Transformed Marketplace
By CFTC Chairman Gensler

“Lastly, one of the greatest threats to well-functioning, open, and competitive futures and swaps markets is that the CFTC – the agency tasked with overseeing your markets – is not sized to the task at hand. That the CFTC completed 65 rulemakings should not be confused with the agency having sufficient people and technology to oversee the markets. At 673 people, we are only slightly larger than we were 20 years ago. Since then though, the futures market has grown and changed significantly. Further, we have this new job of overseeing the vast swaps market. The overall branding of these markets is dependent on customers having confidence in using them…The President has asked for $315 million for the CFTC. This year we’ve been operating with only $195 million… Congress and the President have real challenges with regard to our federal budget. I believe, though, that the CFTC is a good investment for the American public. It’s a good investment for transparent, well-functioning markets.” Read the full speech here.

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Report to Congress on Credit Rating Agency Independence
By the Securities and Exchange Commission

“One of the Congressional findings included in the Dodd-Frank Act was that rating agencies, in particular in advising arrangers of structured financial products on potential ratings of such products, face conflicts of interest that need to be carefully monitored. In light of this finding, the Dodd-Frank Act required, among other things, various studies to be conducted, including a Commission Study on Strengthening Credit Rating Agency Independence. Section 939C requires the Commission to conduct a study of the independence of NRSROs and how NRSRO independence affects the ratings issued by the NRSROs. In conducting this study, the Commission is required to evaluate the management of conflicts of interest raised by an NRSRO providing other services, such as risk management advisory services, ancillary assistance, or consulting services, and the potential impact of rules prohibiting an NRSRO that provides a rating to an issuer from providing other services to the issuer.” Read the full report here.

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Banking Structures Report November 2013
By the European Central Bank

“The report reviews developments relating to the structure of bank intermediation – the capacity, consolidation and concentration of banking sectors and related changes over time. The main findings reflect efforts by banks to rationalise banking businesses, pressure to cut costs, and the deleveraging process that the banking sector has been undergoing since the start of the financial crisis in 2008. While country-specific structural and cyclical factors play an important role, comparable patterns can be observed in developments for most countries. For the euro area as a whole, at the end of 2012 banking sector assets (on a consolidated basis) had dropped by almost 12% compared with 2008, to €29.5 trillion, with the major part of the adjustment taking place in 2009. This was accompanied by a drop in the number of credit institutions, as well as bank restructuring and resolution processes in some countries.” Read the full report here.

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CFPB’s Semi-Annual Report from April 1, 2013 to September 30, 2013
By the Consumer Financial Protection Bureau

“At the Consumer Financial Protection Bureau, we are the nation’s first federal agency whose sole focus is protecting consumers in the financial marketplace. Lending and savings products like mortgages, credit cards, and student loans involve some of the most important financial transactions in Americans’ lives. In the Dodd-Frank Act, Congress created the Bureau to stand on the side of American consumers and ensure they are treated fairly in the consumer financial marketplace. Since we opened our doors just over two years ago, we have been focused on making consumer financial markets work better for the American people, and helping them improve their financial lives.” Read the full report here.

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Understanding the Effects of Certain Deposit Regulations on Financial Institutions’ Operations
By the Consumer Financial Protection Bureau

“The ultimate benefits and costs of a regulation are difficult to measure, and progress in their measurement is likely to come in small increments rather than major breakthroughs. Research on the effects of regulations is an ongoing priority for the Bureau, and we welcome opportunities to work with interested parties to enrich the body of evidence. Meanwhile, we will continue to address problems that we see in the marketplace and evaluate potential responses to those problems on the basis of the evidence that is reasonably available – mindful that, whatever the costs of regulation, the costs of not regulating adequately can be even larger.” Read the full report here.

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The Road to Recovery, How and Why Economic Policy Must Change
By Andrew Smithers

“The world economy is badly managed and thus doing badly. The financial crisis caused the most severe recession since the depression of the 1930s. The fall in output has been arrested but the recovery has been disappointing. If neither the crisis nor the weak rebound were inevitable, we must be suffering from policy mistakes. Either economic theory is sound but being badly applied or it contains serious weaknesses. In this book I will seek to explain what has gone wrong and the steps needed to put the world economy back on track for a sustained recovery.” Read the introduction to his book here.

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Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy
By Federal Reserve Board Staff Dave Reifschneider, William Wascher, and David Wilcox

“The recent financial crisis and ensuing recession appear to have put the productive capacity of the economy on a lower and shallower trajectory than the one that seemed to be in place prior to 2007. Using a version of an unobserved components model introduced by Fleischman and Roberts (2011), we estimate that potential GDP is currently about 7 percent below the trajectory it appeared to be on prior to 2007.” Read the full research paper here.