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What We’re Reading in Financial Regulatory Reform, September 26

Friday, September 26, 2014

Happy end of the third quarter of 2014 and a very happy new year to those celebrating Rosh Hashanah! We hope 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.

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


“Responding to Systemic Risk: Restoring the Balance”
By John C. Dugan, Peter R. Fisher, and Cantwell F. Muckenfuss III, co-chairs of BPC’s Systemic Risk Task Force

“Certain provisions of Dodd-Frank, however, are cause for concern, because they unnecessarily restrict the ability of the Federal Reserve and the FDIC to provide short-term liquidity to the financial system to mitigate the real-economy impact of a financial panic or crisis and they also restrict the ability to guarantee the debt of healthy financial companies in similar circumstances. In addition, Dodd-Frank did not adequately address the provision of temporary liquidity to certain nonbanks that, in a modern financial system, hold substantial quantities of runnable liabilities that are not bank deposits. The Act … did not give the FSOC [Financial Stability Oversight Council] sufficient authority to carry out the duties assigned to it. Finally, although Congress wisely realized the importance of tailoring the regulation and supervision of the newly designated nonbank SIFIs by the Federal Reserve, there are restrictions on and concerns about the Federal Reserve’s ability to achieve these goals.” Read the report here.


Financial Stability Oversight Council: Status of Efforts to Improve Transparency, Accountability, and Collaboration
Testimony of A. Nicole Clowers of the Government Accountability Office before the Subcommittee on Oversight and Investigations, U.S. House Committee on Financial Services

“FSOC has worked to establish accountability and transparency mechanisms and promote collaboration among FSOC members and with external stakeholders. However, further efforts continue to be needed, including fully implementing our September 2012 recommendations. Fully addressing our recommendations will help shed more light on FSOC’s decision making and activities and allow Congress to hold the council accountable for results. Addressing our recommendations can also help FSOC enhance collaboration among its members and with external stakeholders that are critical to their ability to achieve their missions.” Read the testimony here.


Letter to SEC Chair Mary Jo White
By Sens. Carl Levin (D-MI), Jack Reed (D-RI), Edward Markey (D-MA), and Elizabeth Warren (D-MA)

“We urge you to act promptly to finalize and strengthen investor protections for private securities offerings that you proposed more than one year ago. Today marks the one year anniversary of implementation of the Commission’s rule allowing general solicitation and advertising of certain private securities offerings. For the last year, issuers have been allowed to use highway billboards, internet advertisements, cold calls to senior living centers, and promotional T-shirts to market their securities to investors, with no education for investors and limited disclosure of risks. We are deeply concerned that, for the last year, the Commission has allowed private securities offerings to take place using general solicitation and advertising without adequate investor protections.” Read the letter here.


Remarks at the CFPB’s Auto Finance Field Hearing
By Richard Cordray, Director of the Consumer Financial Protection Bureau

“Today we are announcing a proposal to extend our supervisory oversight to larger nonbank auto lenders. … This proposal is needed to level the playing field for banks and nonbanks in the auto lending market. We already supervise the auto lending practices of banks with more than $10 billion in assets, and this step would extend our supervision to the larger nonbank companies as well. It should not matter whether you get a loan or lease from a company that has a banking charter versus one that does not—every auto lender should be following the law and be subject to the same level of oversight. This expansion of coverage is important to protect consumers, but it also will remove a distortion in the marketplace and is a matter of simple fairness to competitors who should play by the same rules in the same way.” Read the full speech here.


Fair Credit Reporting Improvement Act of 2014
Legislation proposed by Rep. Maxine Waters (D-CA)

The proposed legislation “will enhance requirements on the consumer reporting agencies (CRAs), and furnishers that provide information to these CRAs, to guarantee consumers have the capacity to ensure that the information on their credit reports is accurate and complete.” Read the press release here. Read the draft proposal here. Read the summary of the discussion draft here.


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

“The Report begins with an overview of the insurance industry that presents and analyzes the financial performance and condition of the key U.S. insurance sectors. … The Report next includes a section focusing on matters of consumer protection and access to insurance. … The Report then addresses a range of developments—at the state, federal, and international levels—which have occurred or progressed over the past year, and which have implications for the U.S. insurance sector.” Read the report here.


The Pathology of Finance
Remarks by Peter R. Fisher, Senior Fellow, Center for Global Business and Government, Tuck School of Business at Dartmouth; and co-chair, BPC’s Systemic Risk Task Force

“Those of us here tonight can all imagine the economy as existing in three distinct strata or, if I stick to my medical metaphor, with three distinct circulatory systems: first, there are producers and consumers of goods and services, second there are sources and users of funds, and third, there are sources and absorbers of volatility. But many of our fellow citizens (perhaps the sect of macro-economists) simply cannot grasp the volatility system or, more importantly, the interactions of all three systems. My optimistic self is hopeful that our descendants will look back on these years as when we figured out the interactions of all three circulatory systems, at least with respect to governments’ acts and omissions of financial intervention.” Read the speech here.


Letter to the OCC, Federal Reserve Board, and FDIC on Areas Where Regulations Should Be Revised and Modernized
By the Financial Services Roundtable (FSR) and the Securities Industry and Financial Markets Association (SIFMA)

“We recognize that the CFPB is a relatively new agency. However, most of the regulations within the jurisdiction of the CFPB have been in effect for years, and the CFPB has merely republished them without any review or update. To exclude this large a body of federal regulations from the scope of this review deprives the FSR, SIFMA, and other stakeholders an opportunity to address key regulations.” Read the letter here.


The Effects of Bank Capital on Lending: What Do We Know, and What Does it Mean?
By Jose M. Berrospide and Rochelle M. Edge, Federal Reserve Board

“An analysis based on panel data finds modest effects of BHC [bank holding company] capital-to-asset ratios on BHC lending; using macroeconomic time series and aggregate commercial bank balance-sheet data, we find larger—but still modest—effects of capital ratio shocks on loan growth. These results stand in marked contrast to the constant-leverage view.” Read the paper here.


Remarks before the Exchequer Club
By Amias Geraty, Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury

“That is the roadmap for how the Single Point of Entry strategy is expected to work. I want to specifically highlight three other key areas where work continues in order to ensure regulators will be able to carry out a successful resolution: recapitalization of subsidiaries, funding, and derivatives.” Read the speech here.


Where Danger Lurks
By Olivier Blanchard, Economic Counsellor and head of the Research Department of the International Monetary Fund

“We all knew that there were ‘dark corners’—situations in which the economy could badly malfunction. But we thought we were far away from those corners, and could for the most part ignore them. … If macroeconomic policy and financial regulation are set in such a way as to maintain a healthy distance from dark corners, then our models that portray normal times may still be largely appropriate. Another class of economic models, aimed at measuring systemic risk, can be used to give warning signals that we are getting too close to dark corners, and that steps must be taken to reduce risk and increase distance. Trying to create a model that integrates normal times and systemic risks may be beyond the profession’s conceptual and technical reach at this stage.” Read the article here.

KEYWORDS: CANTWELL MUCKENFUSS, CARL LEVIN, CONSUMER FINANCIAL PROTECTION BUREAU (CFPB), DEPARTMENT OF TREASURY, EDWARD MARKEY, ELIZABETH WARREN, JACK REED, JOHN C. DUGEN, MAXINE WATERS