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What We're Reading in Financial Regulatory Reform, July 17

As we approach the 200th day of the year (July 19) and Dodd-Frank’s 5th birthday (July 21), we hope you will check out 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.

Compiled by Aaron Klein, Justin Schardin and Olivia Weiss.

What we’re reading on Dodd-Frank’s 5th birthday

“Dodd-Frank at Five: Assessing Progress on Too Big to Fail”, Remarks at the Dodd-Frank at Five: Looking Back and Looking Forward event, Bipartisan Policy Center and Managed Funds Association, Washington, D.C.
By Lael Brainard, Governor, Board of Governors of the Federal Reserve System

“As standards for systemically important firms tighten, some institutions may determine that it is in the best interest of their stakeholders to reduce their systemic footprint. Indeed, there already have been some notable structural changes at a few of the largest institutions over the past few years that are not readily apparent from looking at the aggregate assets across the systemic institutions. But it is also possible that some may judge that the economies of scale and scope are such that it makes sense to maintain their systemic footprint, even at the expense of the greater regulatory burdens necessary to protect the system relative to those faced by their non-systemic competitors.” Read the speech. Watch the event.

Dodd-Frank Five Years Later: The Good, The Questionable, And The Unintended
By Standard & Poor’s Ratings Services, McGraw Hill Financial

“We expect that, with a more stringent focus by U.S. regulators on qualitative factors, banks’ risk appetite could grow even more restrained over time. Some of the regulations are clearly valuable in terms of reducing risk, while others are still a work in progress or offer less certain value. Also, we believe some rules could have unintended consequences. …While tangible strides have been made in many elements of the U.S. regulatory approach and framework since the crisis, one element that has not changed, in our view, is the patchwork quality of the regulating agencies. Unlike many other countries, in the U.S., what persists is a pluralistic regulatory architecture, with several agencies charged with oversight of banking, insurance, securities, and derivatives markets, and their domains continue to overlap occasionally, depending on the institution.” Read the report.

“Remarks by Treasury Secretary Jacob J. Lew at The Brookings Institution”
By Treasury Secretary Jacob J. Lew

“Wall Street Reform also established the Financial Stability Oversight Council to make sure that regulators were looking at the financial system as a whole and watching out for significant threats to the system. And we have continued to build on that important foundation by increasing the transparency of our designations process and strengthening the Council overall. … To keep taxpayers from ever having to step in to save a financial firm again, Wall Street Reform ended “too big to fail” as a matter of law. In addition, regulators now have modern, commonsense tools to protect taxpayers. For example, the FSOC can designate large institutions as “systematically important” and hold them to higher standards. Also, in the event of a crisis or a bankruptcy, regulators can seize large financial institutions and wind them down in an orderly way.” Read the speech.

What we’re reading on macroprudential regulation

“Macroprudential Policy: Silver Bullet or Refighting the Last War?”
By Claude Lopez, Donald Markwardt, and Keith Savard, Milken Institute

“Understanding the fundamental rationales behind macroprudential policy is essential to appreciate how it complements monetary, fiscal, and structural policies. Indeed, financial regulatory policies are not enough to address systemic risk, and other policies—especially monetary and fiscal policy—also have roles to play. Coordination among monetary, fiscal and macro- and microprudential policies is essential, nationally as well as internationally.” Read the report.

“Financial System Stability Assessment”, Country Report No. 15/170
By International Monetary Fund

“The FSOC should be strengthened with member agencies being given an explicit financial stability
Mandate. … An independent national regulator is an imperative for the insurance sector to address gaps with international standards (including weaknesses in valuation and solvency requirements) and to ensure consistency in regulation and supervision. Bank supervisory guidance for concentration, operational, and interest rate risk needs to be updated. Outstanding rulemaking in the securities and derivatives space should be completed and emerging issues in effective market functioning should be tackled. The supervision of asset managers needs to be enhanced including explicit requirements on risk management and internal control and a structured effort to stress test the industry. Risk management standards for Financial Market Infrastructures need to be fully implemented.” Read the report.

What we’re reading on banking cybersecurity

Remarks by Deputy Secretary Sarah Bloom Raskin at the American Bankers Association Summer Leadership Meeting
By Sarah Bloom Raskin, Deputy Secretary, U.S. Department of the Treasury

“In the spirit of better arming bank leaders for overseeing cybersecurity at their institutions, today I’d like to suggest ten follow-up questions. … These ten additional questions reflect what we have learned in the last six months from our cyber experiences and expand on the initial steps banks can take to enhance cyber resiliency; what I want to do for you today is add greater depth and detail to the 1.0 checklist. We’ll think of the Texas speech as the introductory course and prerequisite for this, the intermediate course.” Read the speech.

“Bank and Other Depository Regulators Need Better Data Analytics and Depository Institutions Want More Usable Threat Information”, Report to Congressional Requesters
By United States Government Accountability Office

“Depository institutions experienced cyber attacks in recent years that are estimated to have resulted in hundreds of millions of dollars in losses. Congress should consider granting NCUA authority to examine third-party technology service providers for credit unions. In addition, regulators should explore ways to better collect and analyze data on trends in IT examination findings across institutions. In written comments on a draft of this report, the four regulators stated that they would take steps responsive to this recommendation.” Read the report.

What we’re reading on monetary policy

“Monetary Policy and the State of the Economy”, Committee on Financial Services, U.S. House of Representatives
By The Honorable Janet L. Yellen, Chair, Board of Governors of the Federal Reserve System

” The Full Employment and Balanced Growth Act of 1978 — commonly referred to as the Humphrey-Hawkins Act — sets four benchmarks for the economy: full employment, growth in production, price stability, and balance of trade and budget. To monitor progress towards these goals, the Act mandates that the Board of Governors of the Federal Reserve present semi-annual reports to Congress on the state of the U.S. economy and the nation’s financial welfare. At these hearings before the Senate Banking Committee and the House Committee on Financial Services, the Chair of the Federal Reserve articulates the strengths and weaknesses of the economy.” Read the Committee Memorandum and watch the live webcast.

What we’re reading on liquidity

Joint Staff Report: The U.S. Treasury Market on October 15, 2014
By U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission

“On October 15, 2014 (“October 15”), the market for U.S. Treasury securities, futures, and other closely related financial markets experienced an unusually high level of volatility and a very rapid round-trip in prices. Although trading volumes were high and the market continued to function, liquidity conditions became significantly strained. … In sum, record trade volumes, a decline in order book depth, changes in order flow and liquidity provision, and notable and unusual market activity together provide important insight into the factors that may have contributed to the heightened volatility, decreased liquidity, and round-trip in prices on October 15.” Read the report.

What we’re reading on Federal Reserve reform

“Fed Oversight: Lack of Transparency and Accountability”, Hearing
By Oversight and Investigations Subcommittee, The Committee on Financial Services , U.S. House of Representatives

“This hearing will examine the Federal Reserve from three perspectives: the lack of transparency and the opacity of internal processes at the Federal Reserve; overreach by the Federal Reserve in expanding its authority and power beyond the authority granted to it under the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203); and the Federal Reserve’s refusal to comply with Congressional investigations and requests for information as well as the lack of legitimate basis for this non-compliance.” Read the Committee Memorandum and watch the live webcast.

What we’re reading on the Financial Stability Oversight Council

“UK Regulator’s Transparency Should Be a Model for U.S. FSOC”
By Aaron Klein, Director, and Justin Schardin, Associate Director, Financial Regulatory Reform Initiative, Bipartisan Policy Center

“Earlier this week, the United Kingdom’s systemic risk regulator, the Financial Policy Committee (FPC), did something its U.S. counterpart has not yet done—provided a detailed record of closed-door meetings, and the ground did not shake. FPC released the record of its June 24 meeting and a follow-up June 29 meeting, demonstrating that a committee of regulators can release detailed minutes of their closed-door deliberations and discussions to the public without undue risk. These minutes should serve as a model for the Financial Stability Oversight Council (FSOC), the FPC’s rough equivalent in the United States.” Read the blog post.

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