This Super Bowl weekend, we hope that you enjoy the following selection of readings.
The Bipartisan Policy Center’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. 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.
<pTestimony before United States Senate Banking Subcommittee on Economic Policy Hearing on “Monitoring Systemic Risk: The Annual Report and Oversight of the Office of Financial Research”
By Richard Berner, Director of the Office of Financial Research
In September 2013, we released Asset Management and Financial Stability, a report on asset management summarizing the results of a study requested by the Council. We designed the report to inform the Council’s consideration of what threats in asset management activities exist and what remedies, if any, might be appropriate to mitigate any such threats. The report had three key findings:
- Asset management activities and firms differ from banking activities and banks…
- Vulnerabilities in some activities could give rise to threats to financial stability, in particular, risk taking in separately managed accounts and the reinvestment of cash collateral in securities lending transactions.
- Significant data gaps hamper analysis. Filling them would be essential to verifying our findings.
“Through our enforcement and supervisory actions, and together with our fellow regulators, our efforts so far will be putting approximately $3 billion back in the pockets of millions of consumers who fell victim to various violations of consumer financial protection laws. This includes a refund of over $6 million to thousands of U.S. servicemembers based on failure to properly disclose costs associated with repaying auto loans through the military allotments system and expensive auto loan add-on products sold to active-duty military. CFPB’s supervisory actions have also caused financial institutions to make changes to compliance management systems that prevented violations, reduced risks to consumers, and resulted in financial restitution to many thousands of additional consumers.” Read the full written testimony here and the semi-annual report here.
Letter to Treasury Secretary Jack Lew Regarding the Office of Financial Research (OFR) Study of Systemic Risk and the Asset Management Industry
By U.S. Senator Mike Crapo (R-Idaho)
“I am concerned that OFR’s failures to take into account the perspectives of and data from market participants will result in flawed evaluation of the asset management industry by FSOC and, worse, a move towards designation of asset management firms as SIFIs [Systemically Important Financial Institutions] without an accurate understanding of the role they play in the financial system.” Read the full letter here.
Federal Reserve Accountability and Transparency (FRAT) Act of 2014 (H.R. 3928)
Introduced by U.S. Representative Scott Garrett (R-NJ)
Banks as Patient Debt Investors
By Jeremy C. Stein, Governor, Board of Governors of the Federal Reserve System
“There are different private technologies for creating safe money-like claims. The ‘banking’ technology involves meaningful amounts of capital as well as deposit insurance and thus leads to deposits that are both safe and relatively stable. The ’shadow banking’ technology uses less capital and manufactures safety by, instead, giving repo investors collateral and the right to seize the collateral on a moment’s notice. So shadow banking money is much more run prone than bank money. Given its relatively stable nature, the banking model is better suited to investing in assets that are illiquid and subject to interim price volatility–that is, to fire-sale risk. These assets can be loans that involve significant amounts of monitoring, or they can be securities that require less monitoring. What is essential is the synergy between issuing stable types of money claims and investing in assets that have some degree of exposure to fire-sale risk. That synergy, in our view, is at the heart of the business of traditional banking.” Read the full speech here.
Advancing and Defending the Securities and Exchanges Commission (SEC) Core Mission
By Michael S. Piwowar, Commissioner, SEC
“The second threat to our core mission is banking regulators trying to impose their bank regulatory construct on SEC-regulated investment firms and investment products. My concern is that the banking regulators, through the Financial Stability Oversight Council (FSOC or Council), are reaching into the SEC’s realm as market regulator… The FSOC, within which the banking and prudential regulators exert substantial influence, represents an existential threat to the SEC and the other member agencies.” Read the full speech here.
The Philosophies of Capital Requirements
By Daniel Gallagher, Commissioner, SEC
“Is the goal to expand the Fed’s role by making it the lender of last resort to non-bank entities such as money market funds and broker dealers, or is it to use its Bank Holding Company Act authority and its role in FSOC to dictate capital requirements to non-bank entities in order to prevent those entities from ever gaining access to the discount window?” Read the full speech here.
“U.S. banks are financed with considerably more capital than previously, meaning that they can suffer more losses (or fines) before failing. And if a large bank does fail, the resolution authority in the Dodd-Frank financial regulatory reform legislation provides legal authority not previously available to deal with failing large banks. The demise of a large bank will be no minor event, but the financial system is safer than previously and so too is the broader economy as a result.” Read full article here.
U.S. regulators ‘funded at a level to fail’
Joe Morris, The Financial Times
“Even with new budget increases, U.S. securities regulators are falling further behind the market when it comes to technology investment, and the investment advisers and swaps dealers they oversee are likely to remain largely uninspected.” Read full article here.
Office of the Comptroller of the Currency (OCC) Guidelines Establishing Heightened Standards for Certain Large Insured National Banks
By the Office of the Comptroller of the Currency
“The standards announced today build on lessons learned from the financial crisis. They will contribute to a safer financial system for all of us by providing clear and enforceable standards for the risk management and governance of our largest institutions. They provide additional supervisory tools to examiners of large national banks and federal savings associations, and they will measurably enhance our supervision of these institutions.” Read the press release here and the proposed rule and guidelines here.
Agencies Release Interim Final Rule on Trust Preferred Securities (TruPS) Collaterialized Debt Obligations (CDOs) Under the Volcker Rule
By the Federal Reserve Board, OCC, Federal Deposit Insurance Commission (FDIC), SEC, and Commodity Futures Trading Commission (CFTC)
Five federal agencies on Tuesday approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (TruPS CDOs) from the investment prohibitions of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Volcker rule. Read the Federal Reserve Board press release here and the interim rule here.
Exporting U.S. Rules for Foreign Banks
Peter Eavis, The New York Times
“The Federal Reserve, which regulates banks, is expected to complete rules soon that will force large foreign banks to abide by many of the requirements their American counterparts have had to operate under since the passage of Dodd-Frank.” Read full article here.
For more information on FRRI, including recent research and upcoming events, please visit https://bipartisanpolicy.org/projects/financial-regulatory-reform-initiative.
KEYWORDS: COMMODITY FUTURES TRADING COMMISSION (CFTC), CONSUMER FINANCIAL PROTECTION BUREAU (CFPB), FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), FEDERAL RESERVE BOARD, MIKE CRAPO, OFFICE OF FINANCIAL RESEARCH, SECURITIES AND EXCHANGE COMMISSION (SEC), THE FINANCIAL TIMES, THE NEW YORK TIMES