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What We’re Reading in Financial Regulatory Reform, March 14

Friday, March 14, 2014

For all those celebrating St. Patrick’s Day, Purim, or Pi Day, we hope that you enjoy the following selection of readings. 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.

The Bipartisan Policy Center’s Financial Regulatory Reform Initiative (FRRI) 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. For more information on FRRI, including recent research and upcoming events, click here.

Compiled by Aaron Klein, Peter Ryan and Justin Schardin


Comment on the Notice on the Resolution of Systemically Important Institutions: The Single Point of Entry (SPOE) Strategy
By BPC’s Financial Regulatory Reform Initiative’s Failure Resolution Task Force

“The task force report strongly supports the FDIC’s SPOE strategy, agreeing that it ‘would be an effective means of resolving SIFIs, including those with significant cross-border or global operations’ and that it has the potential to ‘succeed in solving a critical part of the too-big-to-fail problem, by allowing any SIFI to fail without resorting to taxpayer-funded bailouts or a collapse of the financial system’… More needs to be done, however, to promote market discipline, predictability, certainty and transparency for all stakeholders in the process.” Read the task force’s statement of principles here and the full comment letter here.


Statement of Aaron Klein on “Finding the Right Capital Regulations for Insurers” Before the Subcommittee on Financial Institutions and Consumer Protection of the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
By Aaron Klein, Director, Financial Regulatory Reform Initiative

“It is clear that banks and insurance companies are fundamentally different businesses, which require substantially different capital regimes. In my opinion, Dodd-Frank gave the Federal Reserve Board the necessary authority to the tailor its capital rules for insurance companies. The law clearly supports a tailored approach for insurance companies as well as all non-bank SIFIs. Dodd-Frank envisions a less bank-centric regulatory approach to the non-banks the Board regulates after FSOC designation. It also empowers the FSOC as it relates to authorities as well as institutions. And, it empowers the Federal Reserve and FSOC as it relates to capital rules for non-banks such as insurers.” Read the written statement here.


Remarks at the National Community Reinvestment Coalition Annual Conference
By Steve Antonakes, Deputy Director, Consumer Financial Protection Bureau (CFPB)

“While the Bureau’s mandate focuses on consumer protection rather than on safety and soundness, we very much care about the financial health of banks and credit unions. As a veteran of two banking crises, I can tell you unequivocally that, in my view, consumer protection is not in conflict with safety and soundness. Consumers benefit from a healthy, competitive, and diversified financial services system through greater access to credit and competitive pricing. We hold that banks, credit unions, and nonbanks should be treated alike and receive similar oversight if they offer the same types of financial products and services.” Read the full speech here.


Comment on Rules Implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
By the American Bankers Association (ABA)

“We believe, however, that the Interim Final Rule overlooks other debt securities held by banks that have been inadvertently captured as ‘covered funds’ under the Final Rules. These include, for example, banks’ holdings of TruPS [trust preferred securities] and CDOs [collateralized debt obligations] that are backed by insurance companies and real estate investment trusts (REITs). In addition, the Final Rules appear to require banks to divest the following investments by the end of the conformance period (July 10, 2015): (i) collateralized loan obligations (CLOs); (ii) re-securitized real estate mortgage investment conduits (re-REMICs); (iii) tender option bonds; and (iv) auction rate securities. None of these investments were intended by Congress in the enactment of the Volcker Rule, and all of these investments represent important financial services to bank customers. Therefore, we request that the Interim Final Rule be amended to permit banking entities to continue holding these routine bank investments, consistent with the purposes and objectives of the Volcker Rule, as enacted.” Read the full letter here.


Statement of Adam J. Levitin on “The Dodd-Frank Act’s Impact on Asset-Backed Securities” Before the Subcommittee on Capital Markets and Government-Sponsored Enterprises of the Committee on Financial Services, U.S. House of Representatives
By Adam J. Levitin, Georgetown University Law Center

“A great deal of uncertainty still hangs over the ABS [asset-backed securities] and CLO markets as the shape of both regulatory reform and market reform are not yet complete. The largest ABS markets are based around the financing of mortgage loans, and as long as the GSE question remains unresolved, it seems unlikely that we will see a major rebirth of private-label mortgage securitization. Yet other ABS markets have been rebounding and hopefully will continue to do so. The best regulatory approach at present is to allow Dodd-Frank Act rulemakings to go into effect and continue to monitor the market’s recovery rather than to try and correct course prematurely.” Read the written statement here.


Final Look: A Practical Guide to the Federal Reserve’s Enhanced Prudential Standards for Foreign Banks
By the Deloitte Center for Regulatory Strategies

“The costs to establish and maintain an IHC are likely to be significant because FBOs may need to establish the capabilities and infrastructure to integrate financial, operational, and legal entity information across the [intermediate holding company] IHC and U.S. operations (for risk and liquidity data). The infrastructure put in place will need to support an integrated U.S. IHC view for management, regulatory, and board reporting.” Read the full guide here.


Statement of Michael S. Barr on “Financial Regulation and U.S. Competitiveness” Before the Subcommittee on Oversight and Investigations, Financial Services Committee of the U.S. House of Representatives
By Michael S. Barr, Professor, University of Michigan Law School

“Strong US financial rules are good for the US economy, American households and businesses, but we also need a stronger, harder push to reach global agreement on core reforms. In fact, such an approach is essential in order to reduce the chances of another devastating global financial crisis.” Read the full statement here.


Market Tantrums and Monetary Policy
By Michael Feroli, Anil K. Kashyap, Kermit Schoenholtz, and Hyun Song Shin

“Assessments of the risks to financial stability often focus on the degree of leverage in the system. In this report, however, we question whether subdued leverage of financial intermediaries is sufficient grounds to rule out stability concerns. In particular, we highlight unlevered investors as the locus of potential financial instability and consider the monetary policy implications.” Read the full article here.


Statement of Mario Draghi Before the Committee on Economic and Monetary Affairs of the European Parliament
By Mario Draghi, President, European Central Bank

“[I]mproved financial regulation (as exemplified by CRD IV and by the compromise reached on the BRRD) and the gradual steps towards a true banking union (with a single supervisor, a single resolution mechanism and a harmonised framework for national deposit guarantee schemes) will importantly reduce the risk that a crisis of the magnitude that we have just experienced will materialise again.” Read the full statement here.


Statement on the President’s FY 2015 Budget
By Bart Chilton, Commissioner, Commodity Futures Trading Commission (CFTC)

“[T]his budget asks a strained and exhausted CFTC staff to do the impossible with too little. We work hard here, and have been granted needed regulatory tools to do the job. A magic wand, however, is not among those tools, and we are not magicians. The Agency requires basic, minimal support to accomplish our newly assigned tasks. Sadly, in this regard, the President’s budget request fails.” Read the full statement here.


Statement of Dissent, Fiscal Year 2015 President’s Budget & Performance Plan
By Scott D. O’Malia, Commissioner, CFTC

“I respectfully dissent from the Fiscal Year (“FY”) 2015 budget request because the Commission continues to make improbable funding requests and still continues to significantly under fund technology. I had hoped that the Commission would have completed by now a strategic plan that includes a technology and workforce investment program and sets out the Commission’s mission priorities. However, the Commission has failed to develop such a strategic plan and missed the statutory deadline for submitting the plan to the Administration and Congress. As a result, the Commission makes an unrealistic request for new staff and funding in this budget request without a firm understanding of its mission priorities, specific goals, and corresponding personnel and technology needs.” Read the full statement here.

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KEYWORDS: AMERICAN BANKERS ASSOCIATION, CONSUMER FINANCIAL PROTECTION BUREAU (CFPB), DODD-FRANK ACT, EUROPEAN CENTRAL BANK, FAILURE RESOLUTION TASK FORCE, UNIVERSITY OF MICHIGAN