We hope you’re enjoying the unofficial start to summer. Here is 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.
BPC Urges Cooperation Following Partisan Mark-Up
By Aaron Klein, Director, Financial Regulatory Reform Initiative, Bipartisan Policy Center
“We encourage Republicans and Democrats to work together to reach a consensus proposal. BPC has proposed several ideas to improve regulatory quality, better target systemic risk regulation, enhance accountability and effectiveness of the Federal Reserve’s and Consumer Financial Protection Bureau’s inspectors general, and examine how our regulators could better coordinate on issues that cross our borders. We stand ready to work with folks from both sides to achieve these objectives.” Read the statement here.
BPC Calls for Enhanced Emergency Powers During Financial Panics
By Martin Neil Baily and Phillip L. Swagel, Co-Chairs, Financial Regulatory Reform Initiative, Bipartisan Policy Center
“Restrictions on the Fed’s lender of last resort authority are sometimes seen as a way to address the problem of moral hazard by which private investors take inappropriate risks because they believe that the Fed will bail them out. The solution of restricting the Fed’s ability to act, however, gets the logic of moral hazard backward by making it more difficult in a crisis for the Federal Reserve to punish badly-run firms by allowing them to fail. … At the same time additional restrictions would have the practical effect of delaying assistance to firms facing temporary liquidity problems. … As a result, our financial system would be made less safe by barring use of the very tools that can help mitigate financial panics.” Read the statement here.
“Opening Statement of FDIC Chairman Martin Gruenberg: First Quarter 2015 Quarterly Banking Profile”
By Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation
“In summary, the industry saw a continuation of positive trends during the first quarter. Performance indicators were favorable, notwithstanding the continued downward pressure on net interest margins. Revenue and income were up from a year ago at a majority of banks, asset quality continued to improve, loan balances increased, and there were fewer banks on the problem list. Community banks performed well during the quarter. …Still, the current interest-rate environment remains challenging for banks.” Read the speech here.
FSOC Annual Report Highlights New Emerging Threats
By Justin Schardin, Associate Director, Financial Regulatory Reform Initiative, Bipartisan Policy Center
“On Tuesday, the Financial Stability Oversight Council (FSOC) approved and released its 2015 annual report. … Among the emerging threats highlighted by FSOC as warranting further attention by regulators over the upcoming year were central counterparties and financial innovation.” Read the blog post here.
Report to the Congress on the Use of the ACH System and Other Payment Mechanisms for Remittance Transfers to Foreign Countries
By the Board of Governors, Federal Reserve System
“Anecdotal evidence suggests that, in light of these obligations and associated costs, depository institutions are making business decisions to reexamine their cross-border payment service offerings and account relationships. Specifically, reports suggest that large depository institutions may be reducing or restricting correspondent banking relationships, which in turn may limit the ability of smaller depository institutions to provide remittance transfer services. Reports also suggest that depository institutions may be terminating the accounts of some nonbank payment providers that offer financial services to consumers, such as money services businesses. Without accounts at depository institutions, some nonbank payment providers may be unable to access the financial system and therefore may be unable to continue providing services, including remittance transfer services.” Read the report here.
Liquidity Coverage Ratio: Treatment of U.S. Municipal Securities as High-Quality Liquid Assets
By the Board of Governors, Federal Reserve System
“The Federal Reserve Board on Thursday proposed adding certain general obligation state and municipal bonds to the range of assets a banking organization may use to satisfy regulatory requirements designed to ensure that large banking organizations have the capacity to meet their liquidity needs during a period of financial stress.” Read the proposed rulemaking here. Read the press release here.
“Applying the Insights of Joseph de la Vega’s Confusion de Confusiones to Today’s Derivatives Markets–a Case for More Transparency”, remarks before the Global Derivatives Trading & Risk Management Conference, Amsterdam, The Netherlands
By Mark P. Wetjen, Commissioner, U.S. Commodity Futures Trading Commission
“As part of this enhanced collaboration, the CFTC should make it a long-term goal to be able to share market data and conduct systematic surveillance in near real-time in collaboration with other financial regulatory agencies. Many large market participants have a presence in markets that are overseen by different agencies, and enhanced collaboration would give regulators a more comprehensive picture of their activity. Sharing data and analytics across agencies is also a more feasible and less costly goal with the advent of cloud technology. Further, collaboration between the surveillance teams among different agencies would greatly improve the CFTC’s understanding of its own markets, and the financial system as a whole.” Read the speech here.
“Performance-based Consumer Law”
By Lauren E. Willis, Professor, Loyola Law School, Los Angeles
“When firm and consumer interests are not well-aligned, the resulting transactions are often lousy, whether one uses consumer autonomy or consumer welfare as the metric. With modern experimental and data analysis techniques, firms can run circles around the law’s current disclosure and design rules, yet regulators today are tied to slow, circumscribed responses. What should be added is a regulatory instrument that does three things. First, it should unite the interests of firms with the goals of regulators through performance standards for consumer comprehension and/or suitable consumer product use, thereby redirecting the creative potential of the private sector much as emissions standards do for pollution reduction. Second, the instrument should ground the law on actual consumer knowledge and behavior, rather than hypothesized conceptions of the “reasonable” consumer. Third, it should institutionalize a monitoring system that provides feedback used to improve both the marketplace and regulation in a virtuous cycle.” Read the article here.
“Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry”
By Nathan C. Foley-Fisher, Borghan Narajabad, and Stephane H. Verani, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board
“In this paper, we exploit the contractual structure of funding agreement-backed securities offered by U.S. life insurers to institutional investors. The contracts allow us to obtain variation in investors’ expectations about other investors’ actions that is plausibly orthogonal to changes in fundamentals. We find that a run on U.S. life insurers during the summer of 2007 was partly due to self-fulfilling expectations. Our findings suggest that other contemporaneous runs in shadow banking by institutional investors may have had a self-fulfilling component.” Read the paper here.
“Supervising Large, Complex Financial Institutions: What Do Supervisors Do?” Staff Report No. 729, Federal Reserve Bank of New York
By Thomas Eisenbach, Andrew Haughwout, Beverly Hirtle, Anna Kovner, David Lucca and Matthew Plosser, Federal Reserve Bank of New York
“This paper describes the Federal Reserve’s supervisory approach for large, complex financial companies and how prudential supervisory activities are structured, staffed, and implemented on a day‐to‐day basis at the Federal Reserve Bank of New York as part of the broader supervisory program of the Federal Reserve System. The goal of the paper is to generate insight for those not involved in supervision into what supervisors do and how they do it.” Read the paper here.
Fidelity responds to Financial Stability Board’s G-SIFI consultation
By Fidelity Investments
“Fidelity Investments has filed a comment letter with the Financial Stability Board (“FSB”) and the International Organization of Securities Commissions (“IOSCO”) in which we encourage them to abandon the proposals to designate individual investment funds and asset managers as global systemically important financial institutions (“G‐SIFIs”). We recommend that they instead analyze products and activities across the asset management industry and capital markets, similar to the approach that the FSOC and SEC are taking in the U.S. and that the IMF has endorsed internationally. Fidelity filed this comment letter in response to the Second Consultative Document that the FSB and IOSCO published on March 4, 2015.” Read the comment letter here. Read the executive summary here.