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What We're Reading in Financial Regulatory Reform: May 2

We hope that you enjoy the following selection of readings and videos this weekend. As always, the views expressed in these articles do not necessarily represent the views of the Financial Regulatory Reform Initiative (FRRI), 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. For more information on FRRI, including recent research and upcoming events, click here.

Compiled by Aaron Klein, Peter Ryan and Justin Schardin.

On April 29, Representative Ed Royce (R-CA), Federal Insurance Office Director Michael McRaith and Aaron Klein, Director of the Financial Regulatory Reform Initiative, were among the speakers at a National Journal event entitled “Insurance Regulatory Modernization.” Representative Royce praised FRRI’s recent recommendation for creating a new optional federal insurance charter (read the full report, Dodd-Frank’s Missed Opportunity: A Road Map for a More Effective Regulatory Architecture, here. A discussion of the optional charter is on pp. 33-35.). Below is the bipartisan bill Representative Royce introduced in 2009 that would have created such a charter.

National Insurance Consumer Protection Act
By Representatives Ed Royce and Melissa Bean (D-IL)

“The National Insurance Consumer Protection Act (NICPA) establishes a national system of regulation and supervision for nationally registered insurers, agencies, and producers (agents and brokers) to monitor the systemic risk to the economy from the insurance market, enhance consumer protection and choice, and reduce inefficient regulatory complexity that puts U.S. firms at a competitive disadvantage. States would maintain responsibility for regulating state-licensed insurers, agencies and producers.” Read the press release here and the bill here.

Tailored Supervision of Community Banks. Speech at the Independent Community Bankers of America 2014 Washington Policy Summit
By Janet Yellen, Chair, Board of Governors of the Federal Reserve System

“One theme that has come through loud and clear in [our] outreach is concern about regulatory burden. The financial crisis has prompted significant changes to regulation, so the Federal Reserve understands this concern and strives to minimize regulatory burden for all institutions, including community banks. At the same time, we are taking a fresh look at how we supervise community banks and possible ways that supervision can be smarter, more nimble, and more effective. In that regard, and consistent with my earlier points about too big to fail, we know that a one-size-fits-all approach to supervision is often not appropriate. In recent years, we have taken a number of actions to tailor supervisory expectations to the size and complexity of the banking organizations we supervise.” Read the full speech here.

Letter to President Obama Regarding the Nomination of a Replacement for Federal Reserve Governor Jeremy Stein
By U.S. Senators Heidi Heitkamp (D-ND), Mark Kirk (R-IL), Jon Tester (D-MT), Jerry Moran (R-KS), Mazie Hirono (D-HI), Angus King (I-ME), Tom Coburn (R-OK), Al Franken (D-MN), Mike Johanns (R-NE), Tammy Baldwin (D-WI), Mark Begich (D-AK), Jeff Merkley (D-OR), Mary Landrieu (D-LA), Martin Heinrich (D-NM), Tom Udall (D-NM), and David Vitter (R-LA)

“Nominating an individual with community banking or supervisory experience would ensure future Federal Reserve actions and regulations are tailored and reflect a nuanced understanding of the regulatory and economic environment faced by community banks, and that the role that these institutions play in communities and in our financial system is not diminished.” Read the letter here.

Liquidity and the Role of the Lender of Last Resort – Speech at the Brookings Institution
By Ben Bernanke, Distinguished Fellow in Residence, the Brookings Institution

Additional videos from the conference featuring other leading experts, including Martin Baily, Co-Chair of the Financial Regulatory Reform Initiative, can be viewed here.

H.R. 4167: Restoring Proven Financing for American Employers Act
Introduced by U.S. Representative Andy Barr (R-KY)

This bill exempts certain debt securities of collateralized loan obligations (CLOs) from the Volcker Rule. The bill passed the U.S. House of Representatives on April 30. Read the text of the bill here.

Letter to the Secretary of Education Regarding Changes to Title IV’s Cash Management Rules
By Senator Elizabeth Warren (D-MA) and U.S. Representative George Miller (D-CA). Co-signed by Senators Tom Harkin (D-IA), Barbara Boxer (D-CA), Richard Durbin (D-IL), Jack Reed (D-RI), Sherrod Brown (D-OH), Jeff Merkley (D-OR), Richard Blumenthal (D-CT), Brian Schatz (D-HI), and Edward Markey (D-MA); U.S. Representatives Louise Slaughter (D-NY), Peter Welch (D-VT), Chellie Pingree (D-ME), Alan Lowenthal (D-CA), Mike Thompson (D-CA), Julia Brownley (D-CA), Frederica Wilson (D-FL), Yvette Clarke (D-NY), Karen Bass (D-CA), Susan Davis (D-CA), Raul Grijalva (D-AZ), John Tierney (D-MA), and Jared Huffman (D-CA).

“Federal financial aid is there to help students. When colleges partner with financial institutions and push students into putting their federal student aid refunds into high fee accounts, it puts our federal investment at risk. Students should be able to make unbiased choices about the financial products that work best for them. Colleges should be recommending the financial products that provide the best deal to students, not the biggest financial reward for the institution.” Read the letter here.

Speech on the Resolution of Systemically Important Financial Institutions
By Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation (FDIC), October 2013.

“[T]here has been a quiet transformation in the aftermath of this recent crisis in the approach nationally and internationally to this challenging issue of SIFI resolution. From a position prior to the crisis where this was not an issue of attention or concern, it has risen to a matter of high priority for national and regional jurisdictions, as well as multilateral organizations. I would suggest that the recent crisis has produced a sea-change globally in how jurisdictions view the risks posed by G-SIFIS [Global Systemically Important Financial Institutions] and a determination to develop alternatives to the provision of open-ended public support to address their potential failure.” Read the full speech here.

Are Clearing Houses the New Central Banks? Speech at the Over-the-Counter Derivatives Symposium, Federal Reserve Bank of Chicago
By Paul Tucker, Harvard Kennedy School and Business School

“By making central clearing mandatory for such a large share of the world’s capital markets, the G20 Leaders did a momentous thing. It can, indeed, simplify the network of counterparty credit exposures, make the transmission of risk in the global financial system more transparent, and provide tools for mitigating vulnerabilities and excesses. It is a good policy. But it should prompt economists, policymakers and legislators to pause on the question of what is the optimal – or at least how to avoid a materially sub-optimal – design of these now vital institutions. … Although the distance from households to clearing houses is large, the public now depends on the safety, soundness and efficiency of CCPs. If this part of the plumbing were neglected, it would be a disaster.” Read the speech here.

The Future of Wall Street. Panel Discussion at the Milken Institute Global Conference
Featuring former U.S. Senator Chris Dodd (D-CT), Chairman and CEO, Motion Picture Association of America; Richard Daly, President and CEO, Broadridge Financial Solutions, Inc; Bob Diamond, Founder and CEO, Atlas Merchant Capital; Tom Milroy, CEO, BMO Capital Markets; Ruth Porat, Executive Vice President and Chief Financial Officer, Morgan Stanley; and Robert Shafir, Head, Private Banking and Wealth Management and CEO, Americas Region, Credit Suisse

Does the Revolving Door Affect the SEC’s Enforcement Outcomes?
By Ed DeHaan, Simi Kedia, Kevin Koh, and Shivaram Rajgopal

“We provide empirical evidence on the consequences of the ‘revolving door’ phenomenon at the SEC. If future job opportunities make SEC lawyers exert more enforcement effort to showcase their expertise, then the revolving door phenomenon will promote more aggressive regulatory activity (the ‘human capital’ hypothesis). In contrast, SEC lawyers can relax enforcement efforts in order to curry favor with prospective employers in the private sector (the ‘rent seeking” hypothesis’). … We find evidence consistent with the human capital hypothesis. Specifically, the intensity of enforcement efforts, proxied by the fraction of losses collected as damages, the likelihood of criminal proceedings and the likelihood of naming the CEO as a defendant, are higher when the SEC lawyer leaves to join law firms that defend clients charged by the SEC.” Read the full paper here.

The Flight from Maturity
By Gary Gorton and Andrew Metrick, Professors of Management and Finance, Yale School of Management and Lei Xie, AQR Capital

“Why did the failure of Lehman Brothers make the financial crisis dramatically worse? Our answer is that the financial crisis was a process of a build-up of risk during the crisis prior to the Lehman failure. During the crisis, market participants tried to preserve an option to withdraw or exit by shortening maturities – the ‘flight from maturity’. We show that the flight from maturity was manifested in a steepening of the term structures of spreads in money markets. With increasingly short maturities, lenders created the possibility of fast exit. The failure of Lehman Brothers was the tipping point of this build-up of systemic fragility. We produce a chronology of the crisis which formalizes the dynamics of the crisis. We test for common breakpoints in panels, showing the date of the subprime shock and the dates of runs in the secured and unsecured money markets. A crisis is a dynamic process in which ‘tail risk’ is endogenous.” Read the full paper here.

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