What We're Reading: Financial Regulatory Reform, March 19
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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, and Shaun Kern
Johnson and Crapo Urge Regulators to Address Concerns on Basel III
By Senate Banking Committee Chairman Johnson (D-SD) and Ranking Member Crapo (R-ID)
“Basel III was intended to be a banking, not insurance, framework; the Basel Committee itself has acknowledged that ‘comparisons of individual elements of the [insurance and banking] capital frameworks are potentially inappropriate and misleading.’ We ask that you adhere to such congressional intent in your final rules.” Read the full letter here.
By Federal Reserve Governor Jay Powell
“Today I will discuss ‘too big to fail’ and the ongoing work since the financial crisis to end it. More than three years into this effort, there have been sweeping reforms to the regulation of large financial organizations in the United States and around the world. Substantial proportions of the new rules are designed to end the practice of bailing out such firms with taxpayer money. The too-big-to-fail reform project is massive in scope. In my view, it holds real promise. But the project will take years to complete. Success is not assured.” Read the full speech here.
International Cooperation in Financial Regulation
By Federal Reserve Governor Daniel Tarullo
“Next month marks the fifth anniversary of the failure of Bear Stearns–in retrospect, the beginning of the most acute phase of the financial crisis. The cross-border dimensions of the crisis itself and the global effects of the Great Recession that followed provoked a major effort to strengthen international cooperation in financial regulation. While a good deal has already been accomplished, this evening I will suggest the next steps that would be most useful in advancing global financial stability.” Read the full speech here.
The Financial Policy Committee’s Powers to Supplement Capital Requirements
By The Bank of England
“In June 2010, the Chancellor of the Exchequer set out a plan for fundamental changes to the system of UK financial regulation. In July 2010 and February 2011, the Government published consultation documents on the proposed changes, and in January 2012 introduced the Financial Services Bill to Parliament, which received Royal Assent in December 2012. The legislation establishes a Financial Policy Committee (FPC). The responsibility of the Committee relates primarily to the identification of, monitoring of, and taking of action to remove, or reduce, systemic risks with a view to protecting and enhancing the resilience of the UK financial system, and, subject to that, supporting the economic policy of Her Majesty’s Government, including its objectives for growth and employment.” See the full draft statement here.
Financial Regulators’ Global Variety Show
By Former U.K. Financial Services Authority Chairman Howard Davies
“In the early phases of the financial crisis, it was fashionable to argue that the United States’ system of regulation needed a fundamental structural overhaul…. Little has come of these arguments. The Dodd-Frank Act did succeed in putting the OTS out of its misery, but jealous congressional oversight committees have prevented a merger of the SEC and CFTC, and nothing has been done to rationalize banking supervision. So the American system looks remarkably similar to the one that turned a collective blind eye to the rise of fatal tensions in the early 2000’s.” Read the full piece here.
JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses
By U.S. Senate Permanent Subcommittee on Investigations, Majority and Minority Staff Report
“The JPMorgan Chase whale trades provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system. They also demonstrate how inadequate derivative valuation practices enabled traders to hide substantial losses for months at a time; lax hedging practices obscured whether derivatives were being used to offset risk or take risk; risk limit breaches were routinely disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory oversight was too easily dodged or stonewalled; and derivative trading and financial results were misrepresented to investors, regulators, policymakers, and the taxpaying public who, when banks lose big, may be required to finance multi-billion-dollar bailouts.” Read the full report here.
Financial Globalization: Retreat or Reset?
By McKinsey Global Institute
“Drawing on our proprietary database of financial assets in 183 countries, Financial globalization: Retreat or reset? continues the McKinsey Global Institute’s ongoing series of reports on global capital markets. More than four and a half years after the financial crisis began, we find that recovery has barely started, despite a rebound in some major equity indexes. Growth in financial assets has stalled, while cross-border capital flows remain more than 60 percent below their 2007 peak. Some of the shifts under way represent a healthy correction of the excesses of the bubble years—but continued retrenchment could damage long-term economic growth.” Read the full report here.
By William Hambrecht
“The subsequent debate and inclusion of exemptions has led to much debate on how to define certain aspects of the Act. At the most basic level, the vital question is whether a trade is providing liquidity to the marketplace to help a client, or whether it is a proprietary trade. In today’s environment of sophisticated derivative instruments and algorithms, the answer to this question is incredibly difficult for even the most astute managers to know.” See the full statement here.
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