Whether you are celebrating a holiday this weekend or just taking part in spring cleaning, we hope you enjoy our latest selection of readings from the financial regulatory world. 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).
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.
“Examining the Regulatory Regime for Regional Banks,” Statement to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
By Mark Olson, Co-Chair, Financial Regulatory Reform Initiative’s Regulatory Architecture Task Force, BPC
“Today, I would like to focus on one of our task force’s recommendations raising the so-called “bank SIFI” asset threshold from $50 billion to $250 billion, while giving regulators more flexibility to determine whether or not an institution should be subject to more rigorous oversight. We believe this recommendation strikes the right balance between assuring that financial institutions, whose collapse could pose a significant risk to the financial system, receive an appropriate level of supervision and regulation, while not subjecting those that do not meet this standard with needless rules and oversight which may impede economic growth.” Read the statement.
“FSOC Accountability: Nonbank Designations,” Statement to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
By Aaron Klein, Director, Financial Regulatory Reform Initiative, BPC
“Let me turn to two specific areas where there is room for improvement — public transparency and SIFI de-designation —while noting that BPC research has recommended several other reform measures that FSOC should adopt to improve its operations.” Read the statement.
“The Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) are publishing today for second public consultation Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions (NBNI G-SIFIs). The proposed methodologies for identifying NBNI G-SIFIs complement the methodologies for identifying G-SIFIs that currently cover banks and insurers, and take into account responses received on the first consultative document issued on 8 January 2014.” Read the report.
“The Importance of the Nonbank Financial Sector,” Remarks before the “Debt and Financial Stability— Regulatory Challenges” conference, the Bundesbank and the German Ministry of Finance, Frankfurt, Germany
By Stanley Fischer, Vice Chairman, Board of Governors of the Federal Reserve System
“One of the most important changes has been the rapid growth of the nonbank sector. Many reforms have been adopted for both banks and nonbank financial institutions. But regulation is a cat and mouse game. Regulators need to respond to existing regulatory gaps and to keep pace with further changes. We hope we will succeed in doing so. But we know that we will never be able to identify in advance all the threats to stability that are out there, and that it is therefore all the more critical to maintain and strengthen the robustness of our financial institutions, and of the financial system as a whole.” Read the speech.
“Although it is only applicable to 38 banks, there has been a lot of attention to changing the $50 billion threshold by either increasing it or removing it altogether. However, most of that has not been based on the facts or the statutory and regulatory language, which show that the Fed has discretion on all the standards and has exercised that discretion to tailor those standards on a sliding scale of risk.” Read the fact sheet.
Letter to Federal Reserve Chair Janet Yellen regarding Capital Standard Requirements for Insurance Companies
By Senator Dean Heller (R-NV)
“Because you have frequently stated that capital requirements for insurance holding companies should be specifically tailored to the insurance industry, I respectfully request that you reply with a detailed response outlining what steps the Federal Reserve has taken to that end.” Read the letter here. Read Chair Yellen’s response.
Keynote Address before the Institute of International Bankers, Washington, D.C
By Timothy G. Massad, Chairman, Commodity Futures Trading Commission (CFTC)
“The proposed rule also reflects our focus on the concerns of commercial end-users. As you know, we reproposed a rule in September of last year. Consistent with Congressional intent, our proposal exempts commercial end-users from the margin requirements applicable to swap dealers and major swap participants. We also worked with the bank regulators so that our respective rules are as similar as possible, and their proposed rules also now exempt end-users.” Read the speech.
“Financial Supervision: Basic Principles”, Remarks before the Institute of International Bankers, Washington, DC
By Thomas M. Hoenig, Vice Chairman, Federal Deposit Insurance Corporation (FDIC)
“I want to focus my comments today on a set of supervisory principles that when used effectively have historically proven most useful in assuring the presence of an industry deserving of our confidence. These principles are not complicated or hard to understand, but they can appear painful to the industry. First, all commercial banking firms, not just small and mid-sized ones, should be subject to full-scope examinations. Second, because these largest banks are subsidized and affect the economy so significantly, they should be subject to greater disclosures regarding their financial condition. Third, the Volcker Rule should be implemented. Proprietary trading should be conducted outside the safety net, subject to market forces instead of government protection. Finally, even the largest banking firms should fund and capitalize themselves at levels the market would demand if there was no public safety net.” Read the speech.
Remarks before the Institute of International Bankers, Washington, DC
By Thomas J. Curry, Comptroller of the Currency
“But it’s all too easy to forget that smaller institutions are also affected by global trends—in some cases, profoundly so. At various levels, their customers’ lives and business fortunes are tied to the ups and downs of the global economy—and, therefore, so are the banks’ fortunes. And all banks, large and small, confront operational risks that are inherently transnational, such as cyber security and Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance. In short, the OCC focuses on global banking issues because they affect every bank we supervise.” Read the speech.
Remarks at the 2015 Mutual Funds and Investment Management Conference, Palm Desert, CA
By Michael S. Piwowar, Commissioner, Securities and Exchange Commission (SEC)
“Recently, there have been misinformed efforts aimed at the investment management industry, suggesting that the current regulatory framework for their activities is inadequate and that the industry presents so-called “systemic risks” to the financial markets. Thus, today, I would like to focus on the continuing efforts of prudential banking regulators at both the federal and international levels to “broaden the perimeter of prudential regulation” to regulate the activities of non-bank participants in the capital markets.” Read the speech here.
Remarks at the Investment Adviser Association’s (IAA) 2015 Compliance Conference, Washington, DC
By Patrick Pinschmidt, Deputy Assistant Secretary of FSOC Office, U.S. Department of Treasury
“Now let me walk through the Council’s request for comment on asset management and discuss the key risks the Council is seeking input on. The notice covers four primary topics: liquidity and redemption risk, leverage, operational risk, and resolution. Each section highlights potential areas of concern, identifies industry practices and regulations that may mitigate certain risks, and asks a number of questions about the existence and degree of risk, management practices to address the risks, and potential areas where additional data might be useful.” Read the speech.
Luetkemeyer Reintroduces Legislation to Promote Risk-Based Regulation for Banks
By Representative Blaine Luetkemeyer (R-MO)
“This legislation supports economic growth in the country because not only does it allow our community and regional banks to lend without certain burdens of lending, but it more closely bases the regulation of financial institutions on risk rather than arbitrary asset size,” Luetkemeyer said. “After decades of being in the community banking and insurance businesses, I know firsthand the importance of creating standards that account for risk and the varying structures of small, mid-size, and large financial institutions. Decisions on what institutions are deemed systemically important should be based not on size alone, but also on activity and other factors that actually demonstrate systemic risk.” Read the legislation.
“Consumers and Mobile Financial Services 2015”
By the Board of Governors of the Federal Reserve System
“This report presents findings from the 2014 survey, fielded in December, which focused on consumers’ use of mobile technology to access financial services and make financial decisions. Where applicable, the findings from the current survey are also compared with the findings from the 2011, 2012, and 2013 surveys. Topics include consumer access to bank services using mobile phones (“mobile banking”), consumer payment for goods and services using mobile phones (“mobile payments”), and consumer shopping decisions facilitated by use of mobile phones.” Read the report.
“A Financial System Still Dangerously Vulnerable to a Panic”, Op-ed in The Wall Street Journal
By Hal Scott, Nomura Professor of International Financial Systems and Director, Program on International Financial Systems, Harvard Law School; and Glenn Hubbard, Dean of Columbia Business School
“Dodd-Frank’s Orderly Liquidation Authority is the prayer. The FDIC steps in only if a financial institution on the brink of insolvency is designated by the Treasury secretary, in consultation with the president, as threatening financial stability. This determination is necessary even if the institution has previously been designated as systemically important for regulatory purposes. By the time that determination is made, and even afterward, other institutions may be attacked by runs causing their own insolvency.” Read the article.
“Financial Stability Paper No. 32 – February 2015: Estimating the extent of the ‘too big to fail’ problem — a review of existing approaches”
By Caspar Siegert and Matthew Willison, Bank of England
“Different approaches have been developed to estimate the impact being perceived as [too-big-to-fail] TBTF might have on banks’ costs of funding. We review these different approaches, discussing their pros and cons. Policy measures are being implemented to end the TBTF problem. Approaches to estimating the extent of the problem could play a useful role in the future in evaluating the success of those policies. With that in mind, we conclude by outlining in what ways we think approaches need to develop and suggest ideas for future research.” Read the paper.
“Are the Federal Reserve’s Stress Test Results Predictable?” Report Published by the Office of Financial Research
By Paul Glasserman at the Office of Financial Research and Columbia University, and Gowtham Tangirala at Columbia University
“Regulatory stress tests have become a key tool for setting bank capital levels. Publicly disclosed results for four rounds of stress tests suggest that as the stress testing process has evolved, its outcomes have become more predictable and therefore arguably less informative. In particular, projected stress losses in the 2013 and 2014 stress tests are nearly perfectly correlated for bank holding companies that participated in both rounds… We discuss potential implications of these patterns for the further development and application of stress testing.” Read the report.
“Investment banking: linkages to the real economy and the financial system”
By Kushal Balluck, Analyst, Financial Stability Strategy & Risk, Banking and Insurance Analysis Division, Bank of England
“A number of regulatory initiatives globally have been implemented since the onset of the global financial crisis to correct the fault lines that contributed to it and to build a safer, more resilient financial system. The agreement of these standards for banks is substantially complete, but further work is required to ensure that they are implemented fully, to monitor new risks, build mutual trust and further facilitate international co-operation.” Read the article.