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What We're Reading in Financial Regulatory Reform, June 13

We hope that you enjoy the following selection of readings this Father’s Day weekend. As always, 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.

BPC’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. For more information on FRRI, including recent research and upcoming events, click here.

Compiled by Aaron Klein, Peter Ryan, Justin Schardin.

Insurance Capital Standards Clarification Act of 2014

“The United States Senate… unanimously passed legislation introduced by U.S. Sens. Mike Johanns (R-NE), Susan Collins (R-ME) and Sherrod Brown (D-OH) to clarify that a provision in the 2010 Dodd-Frank law provides the Federal Reserve with the authority to take into account the significant distinctions between banking and insurance when setting capital standards. This bipartisan bill removes any doubt that the Federal Reserve need not impose a bank-centric capital regime on insurance activities.” Read the full press release here and the bill here.

“Economic Inclusion and Financial Integrity.” Remarks to the Conference on Inclusive Capitalism

By Christine Lagarde, Managing Director, International Monetary Fund

“Some of the greatest problems, still outstanding today, lay with the so-called too-big-to-fail firms. In the decade prior to the crisis, the balance sheets of the world’s largest banks increased by two to four-fold. With rising size came rising risk—in the form of lower capital, less stable funding, greater complexity, and more trading. This kind of capitalism was more extractive than inclusive. The size and complexity of the megabanks meant that, in some ways, they could hold policymakers to ransom. The implicit subsidy they derived from being too-big-to-fail came from their ability to borrow more cheaply than smaller banks—magnifying risk and undercutting competition.” Read the full speech here.

“Inclusive Capitalism: Creating a Sense of the Systemic.” Remarks to the Conference on Inclusive Capitalism

By Mark Carney, Governor, Bank of England

“The combination of unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption in some of these markets has eroded social capital. When combined with the longer-term pressures of globalisation and technology on the basic social contract, an unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens. To counter this, rebuilding social capital is paramount. Financial reform is now helping.” Read the full speech here.

“Corporate Governance and Prudential Regulation.” Remarks to the Association of American Law Schools

By Daniel Tarullo, Governor, Board of Governors of the Federal Reserve System

“Why should prudential regulation need to involve itself with corporate governance? … The answer, I think, lies at least in part with the centrality and nature of risk in the activities of financial intermediaries. Risk-taking—whether well- or ill-considered—is perhaps the central activity of all financial intermediaries. Where those intermediaries are significantly leveraged and engaged in maturity transformation, the risk-taking carries substantial potential societal consequences beyond the possible losses to investors, counterparties, and employees of the financial firm. Microprudential and macroprudential regulation each respond to this divergence between the private and social balances of costs and benefits associated with a given level of risk-taking by financial intermediaries.” Read the full speech here.

Letter to Chairman Ander Crenshaw (R-FL) and Ranking Member Jose Serrano (D-NY) of the Subcommittee on Financial Services and General Government, House Appropriations Committee, Regarding Insurance Regulation

By Representatives Randy Neugebauer (R-TX), Spencer Bachus (R-AL), Bill Cassidy (R-LA), Sean Duffy (R-WI), Michael Fitzpatrick (R-PA), Scott Garrett (R-NJ), and 43 others.

“We are concerned that the Department of Treasury and the Federal Reserve Board (Board) are negotiating regulatory standards for the business of insurance through the International Association of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB) without Congressional approval or authority. The proposed standards go far beyond their regulatory jurisdiction and appear to be in direct opposition to the views and objections of U.S. insurance regulators. We are particularly concerned that these federal agencies have participated in FSP and IAIS deliberations in the development of capital standards for internationally active insurers, not just those few, specific insurers to which the Federal Reserve has authority. Time and again, Congress has reaffirmed its commitment to preserving state regulatory authority over the business of insurance. The actions of the federal entities participating in the FSB and the IAIS have clearly gone beyond the scope of authority Congress granted to those entities in federal law, to the potential detriment of U.S. competitiveness, U.S. markets, and most important our domestic policyholders.” Read the full letter here.

“Enhancing Our Equity Market Structure.” Remarks to the Sandler O’Neill & Partners Global Exchange and Brokerage Conference

By Mary Jo White, Chair, Securities and Exchange Commission

“We have taken important steps to further strengthen the investing environment. And today, as we move forward in the next phase of our efforts to enhance our market structure, I am recommending additional measures to further promote market stability and fairness, enhance market transparency and disclosures, and build more effective markets for smaller companies. I am also recommending to the Commission the creation of a new Market Structure Advisory Committee of experts to review specific initiatives and rule proposals. Your input also remains essential to help us ensure that our markets continue to operate openly, fairly, and efficiently to benefit investors and promote capital formation.” Read the full speech here.

Remarks to the Peterson Institute of International Economics

By Kara Stein, Commissioner, Securities and Exchange Commission

“In my view, the SEC can, and must, play a much larger role in addressing systemic risks. We need to be working more closely and effectively with the FSOC and OFR. We need to be improving the stability and resilience of the short-term funding markets. And we need to update and enhance our approaches to capital, leverage, and liquidity for our largest firms and funds. These efforts should not attempt to wring risk out of the capital markets, but we should instead be focused on strengthening the fabric of our entire financial system.” Read the full speech here. You can listen to the speech and post-speech discussion here.

Yesterday, Stanley Fischer was confirmed to be next Vice Chair of the Federal Reserve Board by the U.S. Senate. We think this is a good time to revisit his speech on the regulation of the financial system, delivered in August 2009.

“Preparing for Future Crises.” Remarks to the Federal Reserve Bank of Kansas City

By Stanley Fischer, then-Governor, Bank of Israel

“The argument about macroprudential regulation is closely related to a topic that has been discussed repeatedly at these conferences – how the central bank should respond to asset prices, and particularly to perceived asset price bubbles. This discussion has suffered from three distortions. First, if the issue is posed as that of how to burst a bubble when the only tool at the central bank’s disposal is its interest rate, it is all too easy to argue that nothing should be done until the bubble bursts. The more general issue is whether the interest rate should respond to asset prices and the financial situation more generally, and there is a strong argument that the answer is yes. Second, there is no reason to confine the central bank’s policy tools to the interest rate. Macroprudential tools can be added to its quiver. And third, the right question is not what the central bank should do, but rather what actions need to be taken by the authorities to maintain economic stability and support growth. There is a need for macroprudential regulation, and the question that should be discussed is that of the optimal institutional arrangements to this end.” Read the full speech here.

Volcker Rule Clarity: Waiting for Godot

By Christopher Scarpati, Gary Welsh, Shweta Jain, Christopher McGee, and Jacob Kindberg

“Five months after regulators released the final Volcker rule, banks are pressing ahead with their implementation efforts, but are still waiting for promised guidance to clarify the rule’s many ambiguities. Reminiscent of last year when banks were expecting the final rule, industry commentators have already sounded false alarms regarding this guidance’s imminence. Also, despite establishing an interagency taskforce this year to reconcile supervisory views, the five regulators are again having difficulty coordinating. … They are trying to understand the Volcker rule’s implementation challenges, but are not providing many answers.” Read the full report here.

Remarks at the Mobile Request for Information Field Hearing

By Richard Cordray, Director, Consumer Financial Protection Bureau

“We have identified two areas of opportunities for consumers that we want to know more about. First, we are exploring the ways mobile devices can give access to consumers who do not have easy means to obtain or use current financial products and services. Second, we want to know how mobile devices can offer everyone opportunities for real-time money management.

“While we see so many opportunities for mobile financial services, we also need to be aware of the challenges and risks. Two challenges that we highlight in the Request for Information are customer service and security and privacy.” Read the full remarks here.

BPC-Recommended CFPB Reforms Advance in House Financial Services Committee

By Justin Schardin and Peter Ryan

“[T]he House Financial Services Committee marked up several bills that would have important positive impacts on the way the Consumer Financial Protection Bureau (CFPB) operates. Three of those bills would implement changes that mirror recommendations made in the Bipartisan Policy Center’s (BPC) September 2013 report, The Consumer Financial Protection Bureau: Measuring the Progress of a New Agency.”

“Each of these three bills received some degree of bipartisan support, an indication that they, or similar bills promoting the same core concepts, might be able to successfully make their way through Congress. The ideas behind the three bills are among more than 30 common-sense recommendations made in the BPC report, some of which have already been implemented by the CFPB. We welcome these additional steps in the right direction and encourage their consideration before the full House of Representatives.” Read the full post here.

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