What We're Reading in Financial Regulatory Reform, January 30

We hope you enjoy our latest selection of readings from the financial regulatory world this Super Bowl 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 and Justin Schardin

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Last week, BPC released an overview of a range of recent proposals to reform the Financial Stability Oversight Council (FSOC). BPC also recapped last Wednesday’s FSOC meeting, where recommendations designed to improve the Council’s process for designating financial institutions as systemically important were discussed. Following the meeting, FSOC released detailed minutes from its December meeting.

FSOC Reform: An Overview of Recent Proposals
By Justin Schardin, Aaron Klein and Peter Ryan

“This analysis provides an overview of major FSOC reform ideas. This is not a BPC endorsement of any specific proposal beyond FRRI’s own recommendations and is not intended to capture every FSOC reform idea ever proposed. Instead, BPC hopes that this document can serve as a useful tool for policymakers, lawmakers and other analysts to consider, compare and develop ideas to make FSOC work better.” Read the overview here.

FSOC to Consider New Transparency and Process Measures
By Aaron Klein and Justin Schardin

“[T]he proposed changes appear to be important steps in the right direction. Increased communication with companies under consideration should lead to more informed decision-making. Enhanced public transparency will increase the council’s credibility and give market participants more information on which to make decisions. The changes are also a sign that FSOC is listening to its critics. The measures result from a months-long review process in which FSOC engaged internally and externally with various stakeholders, including the Bipartisan Policy Center (BPC).” Read the blog post here.

Financial Stability Oversight Council (FSOC) Open Session
Watch video of the meeting here.

Minutes of the Financial Stability Oversight Council, December 18, 2014
Read the minutes here.

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House Financial Services Committee Oversight Plan for the 114th Congress
Adopted by the Committee on Financial Services, U.S. House of Representatives

“The Committee intends to continue its close examination of the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No.111-203)(the “Dodd-Frank Act”) by the financial regulators charged with implementing the law to ensure that they prudently exercise the authority conferred upon them under the Act.” Read the plan here.

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Strategies for Improving the U.S. Payment System
By the Federal Reserve System

“[T]he Federal Reserve [has] proposed five desired outcomes for an improved U.S. payment system? The final desired outcomes are 1. Speed: A ubiquitous, safe, faster electronic solution(s) for making a broad variety of business and personal payments? 2. Security: U.S. payment system security that remains very strong, with public confidence that remains high, and protections and incident response that keeps pace with the rapidly evolving and expanding threat environment. 3. Efficiency: Greater proportion of payments originated and received electronically to reduce the average end-to-end (societal) costs of payment transactions and enable innovative payment services that deliver improved value to consumers and businesses. 4. International: Better choices for U.S. consumers and businesses to send and receive convenient, cost-effective and timely cross-border payments. 5. Collaboration: Needed payment system improvements are collectively identified and embraced by a broad array of payment participants.” Read the plan here.

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“The Future of Financial Market Regulation.” Keynote Address before the Monetary Authority of Singapore
By Timothy G. Massad, Chairman, Commodity Futures Trading Commission (CFTC)

“[I]n most areas of financial regulation, the fact that there are differences between national laws wouldn’t be news. ? But the swaps industry grew to be a global market before there was any regulation. So today, many participants expect harmonization. They expect it in timing of implementation as well as in the substance of the reforms. Indeed, they are critical that we haven’t achieved it yet. I would say that those who are critical are looking at the glass as half empty; I see it as half full. The fact is the G-20 nations have agreed on necessary reforms and are moving in the same direction. We have made great progress, and we will continue to do so, but it will take time.” Read the speech here.

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“Making Markets Fair and Effective for All” A Discussion with UK Financial Conduct Authority CEO Martin Wheatley, with Commentary by Federal Reserve Board Governor Jerome H. Powell
By the Initiative on Business and Public Policy, The Brookings Institution

“Recent scandals in the Libor, foreign exchange, gold and other markets have thrown into sharp relief the need for a better understanding of markets and their operations. In June 2014, the UK’s Chancellor of the Exchequer established the Fair and Effective Markets Review (FEMR) to assess the way financial markets function, restore trust in those markets, and contribute to the international debate on trading practices. On January 20, the Initiative on Business and Public Policy at Brookings hosts Martin Wheatley, chief executive of the UK’s Financial Conduct Authority. Mr. Wheatley discussed the FEMR and ways to improve financial market conduct and structure. After Mr. Wheatley’s presentation, Jerome H. Powell of the Federal Reserve provided a U.S. perspective on these issues. Douglas J. Elliott of Brookings moderated the event.” Watch video from the event here and read Governor Powell’s prepared remarks here.

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“Can the U.S. Be an International Financial Center?” Remarks at Women in Housing & Finance Public Policy Luncheon
By Daniel M. Gallagher, Commissioner, Securities and Exchange Commission (SEC)

“I am a fervent believer in the U.S. capital markets and the spirit of American entrepreneurs, and I believe that we can find a way to reverse the downward spiral of anti-competitiveness we find ourselves in, so that the U.S. capital markets will remain the most vibrant in the world for generations to come. ? Post financial crisis, it is imperative that policymakers make a resolution to not only question the pro-regulatory wisdom of Dodd-Frank and other policy responses, but also to dust off the good work that was done pre-crisis on the subject of U.S. capital market competitiveness and bring it to date.” Read the speech here.

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“Financial Well-Being: The Goal of Financial Education”
By the Consumer Financial Protection Bureau (CFPB)

“A growing consensus is emerging that the ultimate measure of success for financial literacy efforts should be improvement in individual financial well-being. But financial well-being has never been explicitly defined, nor is there a standard way to measure it. Overall, the literature paints a picture of nuanced, complex interactions between financial knowledge, understanding, and actions taken. However, rigorously identified links between these factors and financial outcomes have yet to be established. Our project provides a conceptual framework for defining and measuring success in financial education by delivering a proposed definition of financial well-being and insight into the factors that contribute to it.” Read the report here.

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“Central Counterparty (CCP) Default Management, Recovery and Continuity: A Proposed Recovery Framework”
By the International Swaps and Derivatives Association (ISDA)

“Central counterparties (CCPs) are required to develop recovery plans in order to avert a threat to their viability and ensure they can maintain continuity of critical services without requiring the intervention of resolution authorities or resorting to public money. In this paper, ISDA proposes a recovery framework ? as well as tools to re-establish a matched book ? for cases when the default of one or more clearing members threatens the viability of a CCP.” Read the proposal here.

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“Corporate Structures, Transparency and Resolvability of Global Systemically Important Banks.” Study supported by the Systemic Risk Council
By Jacopo Carmassi – Arcelli Center for Monetary and Financial Studies and Richard J. Herring, University of Pennsylvania – The Wharton School

“The complex structure and opaque connections among G-SIBs impeded oversight and market discipline before the crisis and greatly complicated management and resolution after the crisis. ? To enhance market discipline and ensure the credibility of plans to resolve G-SIBs without resort to taxpayer bailouts, greater progress is needed to simplify and rationalize G-SIBs’ organizational structures and improve transparency and market understanding of those structures.” Read the paper here.

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“Changes in Buyer Composition and the Expansion of Credit During the Boom.”
By Manuel Adelino, Duke University – Fuqua School of Business; Antoinette Schoar, Massachusetts Institute of Technology – Sloan School of Management; and Felipe Severino, Dartmouth College -Tuck School of Business

“Earlier research has suggested that distortions in the supply of mortgage credit during the run up to the 2008 financial crisis, in particular a decoupling of credit flow from income growth, may have been responsible for the rise in house prices and the subsequent collapse of the housing market. ? [W]e show that the apparent decoupling of credit from income shown in previous research was driven by changes in buyer composition. In fact, the relationship between individual mortgage size and income growth during the housing boom was very similar to previous periods, independent of how we measure income. Zip codes that had large house price increases experienced significant changes in the composition of buyers, i.e. home buyers (mortgage applicants) had increasingly higher income than the average residents in an area. Poorer areas saw an expansion of credit mostly through the extensive margin, i.e. a larger numbers of mortgages originated, but at [debt-to-income] DTI levels in line with borrower income. When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007.” Read the paper here.