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What We're Reading in Financial Regulatory Reform, December 12

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’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.

Compiled by Aaron Klein, Peter Ryan and Justin Schardin

On December 10, the U.S. House of Representatives unanimously passed S. 2270, the Insurance Capital Standards Clarification Act of 2014. The Senate passed the bill unanimously in June and it now goes to the President for his signature. The Bipartisan Policy Center supports this legislation.

S. 2270, The Insurance Capital Standards Clarification Act of 2014
Introduced by Senators Mike Johanns (R-NE), Susan Collins (R-ME) and Sherrod Brown (D-OH)

“In establishing the minimum leverage capital requirements and minimum risk-based capital requirements on a consolidated basis for a depository institution holding company or a nonbank financial company supervised by the Board of Governors as required under paragraphs (1) and (2) of subsection (b), the appropriate Federal banking agencies shall not be required to include, for any purpose of this section (including in any determination of consolidation), a person regulated by a State insurance regulator or a regulated foreign subsidiary or a regulated foreign affiliate of such person engaged in the business of insurance, the extent that such person acts in its capacity as a regulated insurance entity.” Read the bill text here.

On December 1, the U.S. House of Representatives passed H.R. 5421, the Financial Institution Bankruptcy Act of 2014 by a voice vote. The bill amends title 11 of the U.S. Code in order to facilitate the resolution of an insolvent financial institution in bankruptcy.

H.R. 5421, The Financial Institution Bankruptcy Act of 2014
Introduced by Representatives Spencer Bachus (R-AL), Bob Goodlatte (R-VA) and John Conyers (D-MI)

“The legislation enhances the Bankruptcy Code in order to resolve financial institutions in an efficient and value-maximizing manner for the benefit of the U.S. and global economies, employees, creditors, and customers. This bill has been calibrated carefully to provide transparency, predictability and judicial oversight to a process that must be executed quickly and in a manner responsive to potential systemic risks.” Read the press release by the bill’s co-sponsors here and the text of the bill here.

“Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry.” Remarks at The New York Times DealBook Opportunities for Tomorrow Conference, New York, NY
By Mary Jo White, Chair, Securities and Exchange Commission (SEC)

“Truly tackling systemic risk in any area, obviously, demands a broader program than one agency can execute. Systemic risks cannot be addressed alone – they are, after all, ‘systemic.’ Risks that could cascade through our financial system could have an impact on a range of market participants, many of which we do not oversee. The Financial Stability Oversight Council (FSOC) is an important forum for studying and identifying systemic risks across different markets and market participants. The market perspective that the SEC brings is an essential component of FSOC’s efforts. And FSOC’s current review of the potential risks to the stability of U.S. financial system of asset managers is a complement to the work we are now undertaking.” Read the speech here.

On December 9, the Board of Governors of the Federal Reserve System unanimously approved a proposed rule that would establish risk-based capital surcharges for systemically important U.S. banks. This surcharge has been estimated as ranging between 1 and 4.5 percent of risk-weighted assets.

Opening Statement at Board of Governors Meeting to Consider Proposed Rule on Risk-Based Capital Guidelines: Implementation of Capital Requirements of Global Systemically Important Bank Holding Companies
By Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System

“The proposed system of graduated capital surcharges would be another step toward implementation of section 165 of the Dodd-Frank Act. It builds on the framework for capital surcharges agreed upon in the Basel Committee on Banking Supervision for application to banks of global systemic importance. … The proposed regulation differs from the international framework in two significant respects: the calibration of surcharges would generally be higher than those applicable to the eight covered U.S. banks under the international standard, and the formula by which we calculate applicable surcharges would directly take into account the reliance of each firm on short-term wholesale funding.” Read Governor Tarullo’s opening statement here. A memo written by Governor Tarullo and staff to the Board on the proposed rule can be found here.

“The Federal Reserve’s Financial Stability Agenda.” Remarks at the Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution, Washington, D.C.
By Lael Brainard, Governor, Board of Governors of the Federal Reserve System

“[W]hile the Federal Reserve has an inherent responsibility for financial stability, it has an incomplete set of authorities and a limited regulatory perimeter in a financial system that has large capital markets and a fragmented regulatory structure. It is therefore important that we actively utilize the tools under our authority-which place particular emphasis on building structural resilience at the largest, most complicated institutions through tougher through-the-cycle standards, along with broad countercyclical measures to limit the buildup, and potential consequences, of risks to financial stability, while exploring the design of time-varying sector-specific tools, and, at times, looking to monetary policy as a powerful tool that unlike any other operates across the entire financial system.” Read the speech here.

Remarks at the Interagency Outreach Meeting on The Economic Growth and Regulatory Paperwork Reduction Act, Los Angeles, CA
By Thomas J. Curry, Comptroller of the Currency

“At the OCC, we have three specific proposals to eliminate regulatory burden that we’ve discussed with lawmakers, and we are hopeful that Congress will act on them in the next legislative sessions. First … we think a greater number of healthy, well-managed community institutions ought to qualify for the 18-month examination cycle. … Another idea we think is ripe for congressional action is a community bank exemption from the Volcker Rule. … The final proposal that we have developed would provide federal savings associations with greater flexibility to expand their business model without changing their governance structure.” Read the speech here.

2014 Annual Report
By the Office of Financial Research (OFR)

“[T]he challenges of providing data and analysis for use by financial stability policymakers, and of evaluating financial stability policies and tools, remain consequential. Moreover, financial innovation and migration of financial activity to different markets, institutions, and jurisdictions will always tax our capacity to measure and analyze financial activity. World-class thinking is required to meet these challenges. For our part, the OFR needs the independence, the flexibility, and the resources to attract and retain the core, superior talent required to achieve our mission.” Read the report here.

Principles for CCP Recovery
International Swaps and Derivatives Association (ISDA)

“Clearing houses have become a crucial part of the derivatives market infrastructure, supported by regulation such as the Dodd-Frank Act and the European Market Infrastructure Regulation that requires standardized over-the-counter derivatives to be cleared. With the volume of cleared trades increasing rapidly and certain to grow further, these entities have become systemically important. ISDA and its members therefore believe particular attention needs to be paid to ensuring the risks of a [central counterparty] CCP reaching the point of non-viability are minimized. If that point is reached, however, a clearly defined recovery plan needs to be in place that does not involve the use of public money. The ISDA Principles for CCP Recovery paper identifies the key issues that need to be addressed, and makes several recommendations on how to proceed.” Read the press release here and the Principles document here.

Task Force on Cross-Border Regulation Consultation Report
By the International Organization of Securities Commissions (IOSCO)

“[I]t is important to have a better understanding of how regulatory actions and initiatives undertaken by jurisdictions impact cross-border securities markets. This consultation report describes three cross-border regulatory tools that have been used, or are under consideration, by IOSCO members with respect to a variety of entities, products and services. These three tools provide a basis for developing a cross-border regulatory toolkit and common terminology describing potential options for IOSCO members to consult when considering cross-border regulation. The consultation report also includes a detailed discussion of the key challenges and experiences faced by regulators in implementing cross-border securities regulations.” Read the report here.

“The Lender of Last Resort and Modern Central Banking: Principles and Reconstruction”
By Paul Tucker, Kennedy School and Business School, Harvard University

“Even in those jurisdictions that have some components of a framework for the [lender of last resort] LOLR function, they are rarely brought together in a coherent and digestible whole … that is unsatisfactory and unsustainable if, as it must, central banking is to enjoy legitimacy. If that is not addressed, sooner or later the legitimacy of an independent monetary policy will be compromised. A generation ago, Alan Meltzer called for rules for the LOLR, as a mechanism to combine commitment with control of moral hazard. I agree that a regime is needed; a regime of constrained discretion, where the constraints are widely agreed and public, and where the exercise of discretion can be observed by legislators and reviewed ex post. Three things are needed; a substantive regime, a governance framework and accountability mechanisms.” Read the paper here.

“The Fed Needs More Than an Audit.” Op-Ed in The Wall Street Journal
By Peter Wallison, Senior Fellow, American Enterprise Institute

“Before Congress acts on audit legislation that will certainly complicate the agency’s effort to retain its independence on monetary policy, the Fed should offer to support the consolidation of its regulatory authority into a separate federal financial regulatory body. That was recommended in the Ronald Reagan and George W. Bush administrations. The Federal Reserve has always resisted these proposals, but that may no longer be either advisable or possible.” Read the op-ed here.

Data Shows “Nuclear Option” Had an Impact on Financial Regulatory Appointments
By Justin Schardin

“Over the last year, the Senate confirmed all 11 nominations it received from the president for top financial regulatory posts, eliminating what had been a long-standing backlog. As a result, the Senate’s docket to fill these vacancies is itself vacant, and for the longest time since President Obama took office. Indeed, there has been no independent financial regulatory nominee pending before the Senate in the last 181 days. This development reflects the impact of the so-called “nuclear option,” the parliamentary action taken a year ago by Majority Leader Harry Reid (D-NV) to enable almost all federal judicial and executive-appointment nominees advance to confirmation by a simple majority vote.” Read the blog post here.

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