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What We’re Reading: Financial Regulatory Reform, July 18

Thursday, July 18, 2013

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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, Shaun Kern, and Chris Leech

Keynote Address at the Bipartisan Policy Center on Monetary Policy and the U.S. Economy
Video and remarks by Federal Reserve Governor Jay Powell

The Bipartisan Policy Center (BPC) hosted a discussion with Federal Reserve Governor Jerome H. Powell. Governor Powell shared his views on the benefits and costs of the Federal Reserve’s current monetary policy, as well as the path forward to a stronger U.S. economy. Watch the address here.

Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations
Final Rulemaking by the Commodities Futures Trading Commission

“Close cooperative relationships and coordination with other jurisdictions take on even greater importance given that, prior to the recent reforms, the swaps market has largely operated without regulatory oversight, and given that many jurisdictions are in differing stages of implementing their regulatory reform. To this end, the Commission’s staff has actively engaged in discussions with their foreign counterparts in an effort to better understand and develop a more harmonized cross-border regulatory framework.” Read the full guidance and rule here.

Derivative Rules: Global Problem Needs Global Solution
By Martin Baily, Co-Chair, Financial Regulatory Reform Initiative, and Aaron Klein, Director, Financial Regulatory Reform Initiative

“The CFTC should study the European regulations to make sure that our regulatory system can work with theirs. We should also incorporate the best elements of their system, acknowledging that other nations can often come up with excellent solutions. At no point, however, should we undermine our own regulatory system to make it compliant. We should work with Europe on a race to the top — not the bottom. Good intentions do not always make for the best regulatory system. For example, a strong regulatory regime that is easily avoided by moving trading activities offshore provides little protection. The goal is to get it right — which in this case requires working with other nations.” Read the full op-ed here.

Beyond Capital: The Case for a Harmonized Response to Asset Bubbles
Speech by Federal Reserve Governor Sarah Bloom Raskin

“Still, if regulators become fixated on the tools at the expense of compliance and enforcement, the tools themselves will be meaningless. Only when such tools–be they capital-focused, liquidity-focused, margin–and haircut-focused, or underwriting-focused–are fully embedded into a comprehensive system of prudential regulation will they reach their potential in mitigating the growth of asset bubbles and providing resiliency against the awful consequences attendant to their destruction.” Read the full speech here.

Testimony Before the House Financial Services Committee on whether the Dodd-Frank Act Ends Too Big to Fail
By Former FDIC Chair Sheila Bair

“The Dodd-Frank Act requirements for the regulation and, if necessary, resolution of LCFIs are essential to address the problem of too-big-to-fail and eliminate the need for taxpayer bailouts of failed institutions. I strongly disagree with the notion that orderly liquidation authority (Title II/OLA) enshrines the “bailout” policies that prevailed in 2008 and 2009. Implicit and explicit too big to fail policies were in effect under the legal structure that existed before Dodd-Frank. Dodd-Frank has abolished them.” Read the full testimony here.

Creditor Treatment and Single Point of Entry
By Shaun Kern, Policy Analyst, Financial Regulatory Reform Initiative

“We believe the FDIC should first impose losses on the SIFI’s common shareholders by wiping them out, then should impose losses on the SIFI’s unsecured long-term creditors at the holding company level. This means that unsecured long-term creditors will bear all losses before the FDIC imposes any losses on the SIFI’s unsecured short-term creditors at the operating subsidiary level. Making the long-term unsecured debt “structurally subordinated” to the short-term unsecured debt in this way, combined with pushing losses from the operating subsidiaries up to the holding company, will dramatically simplify the resolution of these SIFIs.” Read the full post here.

The Fundamental Principles of Financial Regulation
Geneva Report on the World Economy, headed by Markus Brunnermeier of Princeton University and the Centre for Economic Policy Research

“The crisis has involved a regulatory failure as much as anything else. Our solution is not more regulation per se, though that may well be required in some areas, but better and different regulation. This is not the first banking crisis that the world has seen. It is more likely to be nearer the one hundredth. If crises keep repeating themselves, policy should change. But it also means that policy makers should not superficially over-react to the particular characters and colour of the current crisis. Schadenfreude at bankers’ expense is satisfying, but it does not really get us anywhere. The crisis should be a call to remedy fundamental market failures that have either been ignored or improperly dealt with in our regulation so far.” Read the full report here.

The Financial Stability Oversight Council’s July 8th Determinations that General Electric Capital Corporation and American International Group are Systemically Important Financial Institutions
Ruling by the Financial Stability Oversight Council

The Council’s designation for General Electric Capital Corporation can be found here. The Council’s designation for American International Group, Inc. can be found here.

2013-07-18 00:00:00