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What We’re Reading in Financial Regulatory Reform, February 27

Friday, February 27, 2015

We hope you enjoy our latest selection of readings from the financial regulatory world, perhaps in between watching episodes of the new season of “House of Cards” this 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.

Compiled by Aaron Klein, Peter Ryan, Justin Schardin and Olivia Weiss


“Financial Institutions, Financial Markets, and Financial Stability”, remarks at the Stern School of Business, New York University, New York“
By Jerome H. Powell, Governor, Board of Governors of the Federal Reserve System

“I believe that sustaining financial stability requires supervisors to consider financial markets, in addition to financial institutions and infrastructure. That is most obviously so when conditions threaten the safety and soundness of the financial system through leverage, liquidity transformation or deterioration of credit underwriting or other risk-management standards. At the same time, financial stability need not seek to eliminate all risks.” Read the speech here.


“Suggestions After a Decade at the Fed,” Remarks at the Economic Club of New York, New York, New York City
By Richard W. Fisher, President, Federal Reserve Bank of Dallas

“I think we at the Fed must fully and frontally address the concern of many who feel that too much power is concentrated in the New York Fed. I would suggest the following common-sense proposals for quelling concerns for securing our franchise as an independent Fed and, in fact, creating a more efficient policymaking and implementing process.” Read the speech here.


S. 530 – A bill to require the president of the Federal Reserve Bank of New York to be appointed by the President, by and with the advice and consent of the Senate
Introduced by Senator Jack Reed (D-R.I.)

“This legislation is about holding the New York Fed accountable. We should have every expectation that the New York Fed has the public interest in mind to the fullest extent when it conducts its duties. Given that the bank plays an outsized role in implementing our nation’s monetary policy and enforcing our banking laws, it’s too influential to be left unchecked.” Read the press release here and the text of the legislation here.


Remarks before the Coalition for Derivatives End-Users
By Timothy G. Massad, Chairman, Commodity Futures Trading Commission (CFTC)

“Over the last 8 months, we have made it a priority to address concerns of commercial end-users. An important part of this effort has been fine-tuning our rules. This is, of course, a natural process for any regulatory agency, but it is particularly appropriate in our case. That is because the CFTC’s responsibilities were increased dramatically as a result of the worst financial crisis this country has faced since the Great Depression. As you know, the agency was given the responsibility to implement a new regulatory framework for the over-the-counter swaps market, a $400 trillion market in the U.S., measured by notional amount. To fulfill that responsibility, the CFTC developed and published many new rules. With reforms as significant as these, it is inevitable that there will be a need for some adjustments. And that is what we have been doing.” Read the speech here.


“Chairman’s Address,” Remarks at the SEC Speaks 2015, Washington, DC
By Mary Jo White, Chair Securities and Exchange Commission (SEC)

“The Commission in 2014 also adopted a strong, comprehensive package of reforms for the regulation and oversight of credit rating agencies, implementing over a dozen rulemaking requirements under the Dodd-Frank Act. These reforms include new requirements to promote greater accountability in the credit ratings process by mandating effective internal control structures, mitigating potential conflicts of interest by requiring a more complete separation of the credit analysis function from sales and marketing activities, and improving the quality and transparency of the ratings process by requiring greater disclosure of rating methodologies and performance.” Read the speech here.


Remarks at the SEC Speaks 2015, Washington, DC
By Daniel M. Gallagher, Commissioner, SEC

“[I]t’s 2015, and we are not even halfway done implementing our Dodd-Frank mandates. What’s worse, some of the mandates we have implemented are more likely to exacerbate than solve the true causes of the financial crisis. Most notably is the Section 941 credit risk retention joint rulemaking, which made the Commission complicit in the ongoing effort by some policymakers to restore the standards-free mortgage lending practices that created the housing bubble that, in turn, caused the financial crisis.” Read the speech here.


Prepared Remarks of CFPB Director Richard Cordray at the National Association of Attorneys General
By Richard Cordray, Director, Consumer Financial Protection Bureau (CFPB)

“We are also keeping a watchful eye on the auto lending market. We are overseeing auto lending practices at the largest banks through our supervisory and enforcement authority as exercised by our strong fair lending team. We are moving forward with a proposed rule to begin to exercise our supervisory oversight over the larger nonbank auto finance companies as well. This is another important aspect of the work we are doing to level the playing field in these markets between banks and nonbank financial providers.” Read the speech here.


Prepared Remarks of CFPB Deputy Director Steven Antonakes at The Exchequer Club
By Steve Antonakes, Deputy Director, CFPB

“It was clear to us from the outset that the traditional approach to supervision wouldn’t work at the Bureau. … [W]e conduct our examinations by product line rather than an institution-centric approach. Accordingly, we assess the likely risk to consumers in all product lines, at all stages of a product’s life cycle and across wide swathes of the entire consumer financial marketplace. Our sole focus on consumer financial protection, along with our footprint in both the bank and nonbank space, makes the Bureau unique among federal regulators.” Read the speech here.


“Building a Capital Markets Union”
By the European Commission

“We need to identify and remove the barriers which stand between investors’ money and investment opportunities, and overcome the obstacles which prevent businesses from reaching investors. We also need to make our system for channeling those funds – the investment chain – as efficient as possible, both nationally and across borders.” Read the paper here.


“Why does financial sector growth crowd out real economic growth?” Bank for International Settlements Working Paper No. 490
By Stephen G. Cecchetti, Professor of International Economics at Brandeis International Business School and Enisse Kharroubi, Senior Economist, Bank of International Settlements (BIS)

“In this paper we examine the negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity. We begin by showing that by disproportionately benefiting high collateral/low productivity projects, an exogenous increase in finance reduces total factor productivity growth. Then, in a model with skilled workers and endogenous financial sector growth, we establish the possibility of multiple equilibria. In the equilibrium where skilled labor works in finance, the financial sector grows more quickly at the expense of the real economy. We go on to show that consistent with this theory, financial growth disproportionately harms financially dependent and R&D-intensive industries.” Read the paper here.

KEYWORDS: COMMODITY FUTURES TRADING COMMISSION (CFTC), CONSUMER FINANCIAL PROTECTION BUREAU (CFPB), EUROPEAN COMMISSION, FEDERAL RESERVE, JACK REED, SECURITIES AND EXCHANGE COMMISSION (SEC), WHAT WE'RE READING