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Financial Reform Must-Reads, October 30

Happy Halloween! We hope you enjoy these “haunting” readings from the financial regulatory world. In addition, we encourage you to join us on (Friday) November 13 for our upcoming event, The Future of Global Insurance Regulation. 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, Kristofer Readling and Olivia Weiss.

What we’re reading on small business

How will the candidates help small business?
By Jason Grumet, President and Aaron Klein, Director of the Financial Regulatory Reform Initiative, Bipartisan Policy Center

“We need to be careful not to overshoot in our desire for financial stability. For the country to move forward, and for the economy to grow faster, we must find the right balance between the competitive spirit of capitalist markets and the wisdom of regulation. Instead of arguing over whether the Dodd-Frank law should stay or go, candidates for president should propose how they would help small businesses access the credit they need to flourish.” Read the op-ed here.

“The Need for Greater Focus on the Cybersecurity Challenges Facing Small and Midsize Businesses”
By Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission 

“The primary responsibility for cybersecurity rests with the SMBs themselves, and the data suggests that SMBs can do a better job of implementing basic cyber defenses. Nevertheless, today’s cybercriminals enjoy significant advantages over SMBs. A vibrant and dynamic partnership between the public and private sectors could do much to level the playing field.” Read the speech here.

“Identifying Opportunities for Reducing Regulatory Burdens on Community Banks,” Remarks at the Economic Growth and Regulatory Paperwork Reduction Act Outreach Meeting, Federal Reserve Bank of Chicago, Chicago, Illinois
By Lael Brainard, Member of the Board of Governors, Federal Reserve System 

“In December 2014, following congressional action, the Federal Reserve amended its regulation to raise the total asset threshold for the policy statement’s applicability from $500 million to $1 billion in total consolidated assets. ?  We are taking a careful look at options that might reduce exam frequency for lower-risk banks and might enable small banking institutions to share expert resources. ?  One additional item that I would consider worthy of congressional consideration in the EGRPRA context would be the stress tests currently performed by smaller, regional lenders, or those above $10 billion in assets but less than $50 billion in assets.” Read the speech here.

What we’re reading on the Federal Reserve dividend rate

“Federal Reserve dividends: Wrong road for a highway funding fix,” The Hill
By Mark Calabria, Director of Financial Regulation Studies, the Cato Institute and Aaron Klein, Director of the Financial Regulatory Reform Initiative, Bipartisan Policy Center 

“Even seasoned watchers of the Federal Reserve were shocked when the Senate attempted to change an obscure dividend rate paid by the Fed to the banks, which are technically the owners of the Federal Reserve System. ? Perhaps worst of all, such would set a dangerous precedent in which changes to the Federal Reserve, including ways in which it conducts monetary policy could be used to fund anything, as in this case it is being used to fund a surface transportation bill.” Read the op-ed here.

“Members of Congress Urge House Leadership to Reexamine Federal Reserve Dividend Proposal”
By Representative Bill Huizenga (R-MI), Chairman of the House Financial Services Subcommittee on Monetary Policy and Trade, and Representative Bill Foster (D-IL)

“We believe that any potential modifications to the current stockownership structure of the Federal Reserve Banks should be thoroughly studied and analyzed to help ensure that Congress understands the policy implications of any changes. In fact, when testifying before the Senate Banking Committee in July, Federal Reserve Chair Yellen stated that the change ?could conceivably have unintended consequences’ and that ?it deserves some serious thought and analysis.’” Read the letter here.

What we’re reading on financial regulation

“Is Dodd Frank orderly liquidation authority necessary to fix too-big-to-fail?” Economic Policy Working Paper 2015-09, American Enterprise Institute
By Paul H. Kupiec, Resident Scholar, American Enterprise Institute

“To end TBTF, financial regulation must be refocused on: (i) ensuring the uninterrupted operation of important subsidiaries by increasing capital requirements on banks and critical functionally-regulated affiliates?not parent holding companies; (ii) reforming the deposit insurance bank resolution process to mandate the break-up of large failing banks; (iii) removing the regulatory structure that creates TBTF investor expectations; and (iv) requiring SIFI parent companies to reorganize or liquidate using a judicial bankruptcy process in which similarly situated creditors are treated equally.” Read the paper here.

“The Financial Crisis: Lessons for the Next One,” Report from the Center for Budget and Policy Priorities
By Alan S. Blinder, Professor of Economics and Public Affairs, Princeton University and Mark Zandi, Chief Economist, Moody’s Analytics 

“In the spirit of addressing potential moral hazards before, as opposed to during, the crisis, policymakers should employ macroprudential tools to avoid or minimize asset bubbles and the increased leverage that are the fodder for financial catastrophes. Doing so includes requiring more capital and liquidity in the financial system, stress-testing financial institutions, and strengthening regulatory vigilance, particularly over large institutions and rapidly growing parts of the system.” Read the report here.

What we’re reading from Capitol Hill

Sen. Brown, Rep. Waters Urge Congress to Reject Policy Riders Aimed at Weakening Financial and Consumer Protections, U.S. Senate Committee on Banking, Housing and Urban Affairs
By Senator Sherrod Brown (D-OH)Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs and Representative Maxine Waters (D-CA), Ranking Member of the House Committee on Financial Services 

“As you continue to discuss government funding for the rest of the fiscal year, we are writing to express our opposition to appropriations riders that would roll back the protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act. While we are opposed to the inclusion of all inappropriate and ideological policy riders to funding legislation, as the Ranking Members of the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services, we are specifically concerned about ones designed to repeal, undermine, or delay provisions of Wall Street reform.” Read the letter here.

What we’re reading on monetary policy

“Why So Slow? A Gradual Return for Interest Rates”
By Vasco Cúrdia, Research Advisor in the Economic Research Department, Federal Reserve Bank of San Francisco

“This Letter suggests that the natural rate of interest is expected to remain below its long-run level for some time. This implies that low interest rates over the next few years are consistent with the most efficient use of resources and stable inflation. The analysis also finds that the output gap is expected to remain negative even after the natural rate is close to its long-run level. Additionally, there is considerable uncertainty about both the short-run dynamics as well as what level should be expected in the longer run. All these considerations reinforce the possibility that interest rate normalization will be very gradual.” Read the letter here.

What we’re reading on student loans

“Annual report of the CFPB Student Loan Ombudsman”
By the Consumer Financial Protection Bureau

“When considering steps to improve the services and information provided to student loan borrowers, policymakers may be inclined to focus on borrowers with federal Direct Loans, which are the source of more than 90 percent of new student loan originations. Even though no new federal loans have been made by private lenders under FFELP in more than five years, borrowers with these loans still comprise nearly one-third (31 percent) of all outstanding federal student loans. Policymakers should take steps to ensure that any initiatives to reform the student loan servicing market address continuing distress among borrowers with FFELP loans.” Read the report here.

What we’re reading on the U.S. Treasury markets

“The Evolving Structure of U.S. Treasury Markets,” Remarks at the Federal Reserve Bank of New York
By Jerome H. Powell, Member of the Board of Governors, Federal Reserve System

“I would point to four important trends that have been driving the changing structure of these markets: first, advances in computerized trading and high-speed communications and the entry of new players using these technologies; second, the intensified prudential regulation and supervision of the systemically important banks that are the largest dealers; third, the banks’ own re-evaluation of risk in the wake of the financial crisis; and fourth, the increasing importance of mutual funds and other asset managers.” Read the speech here.

“Working Paper Explores Literature on Financial Networks and Interconnectedness”
By Paul Glasserman, Office of Financial Research and Columbia University and H. Peyton Young, Office of Financial Research, University of Oxford, and the London School of Economics 

“We argue that the lack of information is not merely a problem for regulators and analysts; it also creates uncertainty for market participants that can become particularly acute in times of crisis. In other words, the opacity of the network due to lack of information is itself a contributor to contagion, and may lead to cascades and funding runs that would not occur if the network of obligations were known with greater certainty.” Read the paper here.

“Remarks by Counselor to the Secretary Antonio Weiss at a Conference on the Evolving Structure of the U.S. Treasury Market”
By Antonio Weiss, Counselor to the Secretary, U.S. Department of the Treasury 

“One of the key lessons in all of this is that the plumbing matters. ?  From last October 15 in Treasury markets, to May 6, 2010 or even this past August 24 in equity markets, we have seen how episodes of volatility can be magnified by the interaction at high speeds of automated trading strategies and a complex array of trading rules, venues and products.” Read the speech here.

“Tri-Party Repo”
By the Federal Reserve Bank of New York

“The data are being provided to the public in the interest of creating greater transparency on the size of the U.S. tri-party repo market and the nature of its activity, as outlined in Recommendation 13 of the Tri-Party Repo Task Force Report. ? The underlying data includes all transactions in the US tri-party repo market, excluding GCF. In particular, it includes those transactions involving the Federal Reserve.” See the data here.

 “Fragilities in the U.S. Treasury Market: Lessons from the ‘Flash Rally’ of October 15, 2014”
By Antoine Bouveret, Peter Breuer, Yingyuan Chen, David Jones, and Tsuyoshi Sasaki, Monetary and Capital Markets Department, International Monetary Fund 

“Changes in the structure of the U.S. Treasury market over recent years may have increased risks to financial stability. Traditional market makers have changed their liquidity provision by increasingly switching from risk warehousing to risk distribution, and a new breed of market maker has emerged with the rise of electronic trading. The “flash rally” of October 15, 2014 provides a clear example of how those risks can materialize. Based on an in-depth analysis of the event?complementing the authorities’ work?we suggest i) providing incentives for liquidity provision, ii) improving market safeguards, and iii) enhancing the regulation of the Treasury market.” Read the paper here.

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