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What We're Reading in Financial Regulatory Reform, October 9

We hope you enjoy these 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, Kristofer Readling and Olivia Weiss.

What we’re reading on insurance regulation

The Business of Insurance and Banking: Understanding Two Different Industries
By The Insurance Task Force, Bipartisan Policy Center

“The business of insurance is fundamentally different from the business of banking. Each has its own specific models and practices, risk profiles, risk-management strategies, and regulatory regimes. Each has a different balance sheet, revenue stream, and customer value
proposition. Insurers and banks run into financial trouble for very different reasons and the regulatory approaches to managing troubled insurers and banks are markedly different. This paper describes the differences between insurance and banking. It examines and compares key aspects of both industries: size, business models, distribution channels, regulatory oversight, safety and soundness, consumer protection, reasons for failure,
resolution, and systemic risk.” Read the primer.

Annual Report on the Insurance Industry
By Federal Insurance Office, U.S. Department of the Treasury

“The Report addresses a number of U.S. regulatory developments related to the business of insurance. The Report considers developments relating to the use of captive reinsurers by life insurance companies. In the Modernization Report, FIO recommends that states “develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives. … the final section of the Report provides updates regarding the EU-U.S. Insurance Project (the Project) and the international prudential standard-setting activities of the IAIS, and concludes with an update of resolution activities at the Financial Stability Board (FSB) and the IAIS. Progress has occurred in all of these areas.” Read the report. Watch the congressional testimony.

What we’re reading on financial regulation

“Capital Regulation Across Financial Intermediaries,” Remarks at the Banque de France Conference: Financial Regulation–Stability versus Uniformity; A Focus on Non-bank Actors, Paris, France
By Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System

“My discussion today would suggest that attention must be paid to the liability structure of the different firms before deciding whether the asymmetric regulatory treatment is prudent or an invitation to the propagation of new financial risks.” Read the speech.

“Final Report: Draft Regulatory and Implementing Technical Standards MiFID II/MiFIR”
By the European Securities and Market Authority

“This final report deals with technical standards from the areas of transparency (Standards 1-5), market microstructure (Standards 6-12), data publication and access (Standards 13-16), requirements applying on and to trading venues (Standards 17-19), commodity derivatives (Standards 20 and 21), market data reporting (Standards 22-25), post-trading (Standard 26) and investor protection (Standards 27 and 28). It describes the feedback received in the public consultations and the rationale behind ESMA’s final proposals.” Read the report.

What we’re reading on macroprudential policy

“Capital Controls or Macroprudential Regulation?” IMF Working Paper
By Anton Korinek, Assistant Professor, Department of Economics at Johns Hopkins University and Damiano Sandri, Economist, International Monetary Fund

“Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy’s debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.” Read the paper.

“Macroprudential Policy in the U.S. Economy,” Panel remarks at the Macroprudential Monetary Policy Conference, Federal Reserve Bank of Boston, Boston, Massachusetts
By Stanley Fischer, Vice Chairman, Board of Governors of the Federal Reserve System

“The need for coordination across different regulators with distinct mandates creates challenges to the timely deployment of macroprudential measures in the United States. Further, the toolkit to act countercyclically in the face of building financial stability risks is limited, requires more research on its efficacy, and may need to be enhanced. Given these challenges, we need to consider the potential role of monetary policy in fostering financial stability while recognizing that there is more research to be done in clarifying the potential costs and benefits of doing so when conditions appear so to warrant.” Read the speech.

What we’re reading on liquidity

“Regulation and Liquidity Provision,” Remarks at the SIFMA Liquidity Forum, New York City
By William C. Dudley, President and Chief Executive Officer, Federal Reserve Bank of New York

“In sum, there is limited evidence pointing to a reduction in the average levels of liquidity. However, there are reasons to think liquidity risk may have increased, and there are some data to support this conjecture. … Clearly many factors could affect liquidity provision. On the regulatory side, capital and liquidity requirements are probably the most important factors. … For the U.S Treasury market, the most important change in regulatory requirements is probably the introduction of the supplementary leverage ratio (SLR) in the United States. … For the corporate bond market, the most relevant factors are probably the increase in the Basel risk-weighted capital ratio, the Comprehensive Capital Analysis and Review (CCAR) stress tests … and the Volcker Rule.” Read the speech.

U.S. Equity Market Structure: Lessons from August 24
By BlackRock

“As described in this ViewPoint, we believe that a holistic approach to enhancing equity market structure is necessary to help the market better cope with periods of excessive volatility and order imbalance. … As such, there is a need to revisit and enhance well-intentioned and important market protection mechanisms such as the market-wide circuit breaker and LULD as well as exchange opening procedures.” Read the publication.

“Has U.S. Corporate Bond Market Liquidity Deteriorated?” Liberty Street Economics
By Tobias Adrian, Michael Fleming, Or Shachar, and Erik Vogt, Federal Reserve Bank of New York

“In conclusion, the price-based liquidity measures—bid-ask spreads and price impact—are very low by historical standards, indicating ample liquidity in corporate bond markets. This is a remarkable finding, given that dealer ownership of corporate bonds has declined markedly as dealers have shifted from a “principal” to an “agency” model of trading. These findings suggest a shift in market structure, in which liquidity provision is not exclusively provided by dealers but also by other market participants, including hedge funds and high-frequency-trading firms.” Read the post.

“Vulnerabilities, Legacies, and Policy Challenges: Risks Rotating to Emerging Markets,” Global Financial Stability Report, Chapter 2: Market Liquidity—Resilient or Fleeting? Chapter 3: Corporate Leverage in Emerging Markets—A Concern?
By the International Monetary Fund

“Chapters 2 and 3 of the October 2015 Global Financial Stability Report respectively examine the determinants and resilience of market liquidity and the growing level of corporate debt in emerging markets. In terms of market liquidity, the current levels are being sustained by benign cyclical conditions and accommodative monetary policy. At the same time, some structural developments may be eroding its resilience. As for the growing level of corporate debt in emerging markets, which quadrupled between 2004 and 2014, global drivers have played an increasing role in leverage growth, bond issuance, and corporate spreads. The greater role of global factors during a period when they have been exceptionally favorable suggests that emerging markets must prepare for the implications of global financial tightening.” Read the overview. Read chapters 2 and 3.

What we’re reading on student loans

“Remarks by Deputy Secretary Sarah Bloom Raskin at the National Foundation for Credit Counseling 50th Annual Leaders’ Conference”
By Sarah Bloom Raskin, Deputy Secretary, U.S. Department of the Treasury

“The design of consumer credit markets must incorporate some notion of navigation. In the student loan context, navigation is only possible if student loan servicers move borrowers to sustainable payment plans. You have always been beacons in the maze of credit finance. Student loan servicers also have a responsibility in this regard, and I look forward to seeing proof that they are guiding borrowers well, or otherwise adopting standards for the student loan servicing market. For struggling borrowers, we need to see increased enrollment in income-driven repayment plans, high touch servicing, and counseling that helps borrowers understand their options and sets them on a more secure financial path.” Read the speech.

“Student loan servicing: Analysis of public input and recommendations for reform”
By the Consumer Financial Protection Bureau

“In less than a decade, the volume of outstanding federal student loan debt has more than doubled, rising from $516 billion in to greater than $1.2 trillion in the third quarter of 2015, surpassing all other categories of consumer debt aside from mortgages. During the same period, the number of federal student loan borrowers has grown by nearly 45 percent, rising from 28.3 million to 40.8 million. … Based on the analysis and commentary offered in this report, the Bureau identified four general principles that should inform any future action in this market … At minimum, student loan servicing should be: consistent; accurate and actionable; accountable; and transparent.” Read the report.

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