What We're Reading in Financial Regulatory Reform, July 25
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Happy Dodd-Frank birthday. As the law turns four, we have a selection of readings and videos focused on looking back and thinking ahead. We hope you enjoy them. 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).
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.
Keynote remarks by former Senator Chris Dodd and former Comptroller of the Currency Gene Ludwig at BPC’s event “Dodd-Frank at Four: Making Progress, Meeting Challenges, & Finding Solutions”
Panel discussion with Roger Blissett, Mike Calhoun, Kieran Fallon, Annette Nazareth, Damon Silvers and POLITICO’s Ben White, at BPC’s event “Dodd-Frank at Four: Making Progress, Meeting Challenges, & Finding Solutions”
“Dodd-Frank: Progress, Challenges and Solutions”
By BPC’s Financial Regulatory Reform Initiative
“July 21, 2014 marks the fourth anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) becoming law. While much of the law remains to be fully implemented and its impact analyzed, a number of its provisions have resulted in progress for U.S. financial regulation. Still, challenges need to be overcome.” Read the top ten lists here. See Aaron Klein’s presentation of the top ten lists here.
“Failing to End ‘Too Big to Fail’: An Assessment of the Dodd-Frank Act Four Years Later”
By the Republican Staff of the Committee on Financial Services, U.S. House of Representatives
“The 2008 financial crisis presented Congress, the regulators, and the financial markets with an opportunity to break decisively with the past – to do things better, to be smarter, to learn from our mistakes. But by resorting to the same failed strategies and misplaced confidence in the powers of regulation and regulators that led to the financial crisis in the first place, the Dodd-Frank Act squandered that opportunity. Instead, the Dodd-Frank Act further entrenched the problem of ‘too big to fail’ by giving regulators even greater control over our financial system and a virtually unlimited pot of taxpayer money to bail out financial institutions when regulation inevitably fails.” Read the report here.
“The Fourth Anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010”
By the Democratic Staff of the Committee on Financial Services, U.S. House of Representatives
“In the last four years, much has been accomplished, and Americans from across the political spectrum — Democrats, Republicans, and Independents — overwhelmingly support regulating the financial services industry and financial products to ensure that consumers and taxpayers are protected…However, this progress has been regularly stymied by a concerted effort by the Majority to underfund regulators’ operations, relentlessly pressure them to weaken regulations, and otherwise erect roadblocks to implementation. As a result, the progress regulators have made to implement the law remains precarious.” Read the report here.
Dodd-Frank at 4: Where do we go from here?
By Morrison & Foerster
“Substantial rulemaking progress was made in the last year (since July 2013) with many of the most important and most controversial Dodd-Frank Act related rules having been finalized. Below we offer a quick recap of the most significant regulatory developments of the last year in the United States. We also provide a review of the most significant developments in Europe.” Read the report here.
“Breaking the Impasse on Dodd-Frank”
By Martin Neil Baily, Phillip L. Swagel and Aaron Klein
“Any piece of major legislation will contain some mistakes. At the same time, the reality is that Dodd-Frank is here to stay. Rather than tilt at repeal, it would be better for opponents to embrace steps to improve the law’s effectiveness. The changes described above will strengthen, not weaken, financial regulation. Supporters would do well to solidify the law by embracing these sensible changes.” Read the article here.
Remarks at the National Bureau of Economic Research, Cambridge, MA entitled “Financial Sector Reform: How Far Are We?”
By Stanley Fischer, Vice Chairman, Board of Governors of the Federal Reserve System
“What about simply breaking up the largest financial institutions? Well, there is no “simply” in this area. At the analytical level, there is the question of what the optimal structure of the financial sector should be. Would a financial system that consisted of a large number of medium-sized and small firms be more stable and more efficient than one with a smaller number of very large firms?… Would breaking up the largest banks end the need for future bailouts? That is not clear, for Lehman Brothers, although a large financial institution, was not one of the giants–except that it was connected with a very large number of other banks and financial institutions. Similarly, the savings and loan crisis of the 1980s and 1990s was not a [too big to fail] TBTF crisis but rather a failure involving many small firms that were behaving unwisely, and in some cases illegally…. In short, actively breaking up the largest banks would be a very complex task, with uncertain payoff. “ Read the speech here.
Remarks at the Kennedy School of Government, Harvard University entitled “Institutions for Macroprudential Regulation: The UK and the U.S.”
By Donald Kohn, Senior Fellow, The Brookings Institution
“Without question, FSOC is a step forward in the U.S. in dealing with systemic issues in the financial markets. Most macroprudential tools work by tweaking microprudential tools, and FSOC has all the heads of all the microprudential regulators sitting on it for discussions of systemic issues and how they might be dealt with. This should foster understanding of how each agency’s actions can affect stability. Moreover, by all reports, FSOC has helped to foster coordination and cooperation among these regulators—much more so than existed in the past. However, the early years of FSOC have also revealed structural issues and shortfalls in its ability to accomplish the objectives we identified for macroprudential regulation.” Read the speech here.
Remarks at the American Enterprise Institute Conference on Financial Stability
By Michael S. Piwowar, Commissioner, Securities and Exchange Commission (SEC)
With the [Financial Stability Oversight] Council’s steady march, led by its self-appointed ‘alpha dog’ – the Fed – into areas that are solely within the SEC’s jurisdiction, I am concerned that our mission to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation is being compromised. I am resolved to defend our jurisdiction from the prudential regulators’ Council-enabled turf war, but the prudential regulators are mounting a coordinated behind-closed-doors assault that is currently six times the size of our defensive team. That is why I will continue to fight for more SEC representation – and less prudential regulator representation – in deliberations of the Council. That is why I will continue to support Congressman Garrett’s determined efforts to make the Council accountable and transparent. Read the speech here.
Statement Before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law of the Committee on the Judiciary, U.S. House of Representatives on the “Financial Institution Bankruptcy Act of 2014”
By Thomas H. Jackson, Distinguished University Professor and President Emeritus, University of Rochester and Failure Resolution Task Force Member, BPC
“It is clear that the Bankruptcy Code needs tweaking — sometimes subtle, detailed, and complicated, but tweaking nonetheless —to permit it to be, in the vast majority of cases, a viable resolution mechanism of a [systemically important financial institution] SIFI, fully competitive with —and in some respects, superior to—the [Federal Deposit Insurance Corporation’s] FDIC’s [single point of entry] SPOE proposal for Title II of the Dodd Frank Act.”Read the statement here.
Should the Fed Do Emergency Lending?
By Jeffrey Lacker, President, Federal Reserve Bank of Richmond and Renee Haltom, Content Manager, Research Department, Federal Reserve Bank of Richmond
“History shows that the central bank’s “lender of last resort” role was originally conceived as a strictly monetary function: providing an elastic supply of monetary assets when the demand for such assets expanded in times of financial distress. Experience suggests that the Fed’s activities should be limited to more closely align with this original vision. When the central bank utilizes ‘lender of last resort’ powers to allocate credit to targeted firms and markets, it encourages excessive risk-taking and contributes to financial instability. It also embroils the central bank in distributional politics and jeopardizes the independence that is critical to the central bank’s ability to ensure price stability. The lesson to be learned from the expansive use of the Fed’s emergency-lending powers in recent decades is that it threatens both financial stability and the Fed’s primary mission of ensuring monetary stability.” Read the article here.
“Section 165 Revisited: Rethinking Enhanced Prudential Regulations”
By Andrew Olmem, Partner, Venable LLP
“There are other important policy reasons for reviewing strict asset thresholds. A more graduated and tailored approach would help prevent enhanced prudential standards from serving as either unfair competitive burdens or barriers to entry. Bank holding companies with similar risk profiles should not be subject to vastly different regulatory regimes simply because they are on opposite sides of an arbitrary threshold. Conversely, enhanced prudential standards should not impose costs that deter smaller bank holding companies, especially those just below the $50 billion asset threshold, from entering markets simply to avoid triggering new regulatory requirements (unless, in doing so, they create risks to financial stability).” Read the article here.
“Implicit Subsidies for Very Large Banks: A Primer”
By Douglas J. Elliott, Fellow, The Brookings Institution
“The Government Accountability Office (GAO) will be issuing a report shortly, at the request of members of Congress, on the size of the implicit subsidy enjoyed by the largest banks. This primer attempts to aid readers of that report by explaining the key analytical questions that need to be addressed in deciding whether there is an overall competitive advantage for the biggest banks from preferential government treatment and in determining the size of that subsidy. One key point to recognize up-front is that the GAO was asked to opine on a relatively narrow question that inflates the level of calculated subsidy by ignoring a number of countervailing factors. The GAO was asked to calculate the improvement in borrowing costs, but not to consider the magnitude of a number of additional regulatory requirements that have been put in place that handicap the largest banks. The net competitive advantage is the relevant figure for the most critical policy decisions.” Read the paper here.
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