BPC Event on Post -Crisis Regulation with Richard Berner
Bipartisan Policy Center
“Did Policymakers Get Post-Crisis Financial Regulation Right?”
Tuesday, December 6, 2016
Key Topics & Takeaways
- Liquidity: OFR Director Berner called market liquidity a good example of an area where more information is needed. He said there has been much discussion of whether regulations have diminished liquidity, but that the evidence is “pretty mixed.” He added that an important part of understanding market liquidity will be studying short-term funding, such as repurchase agreements, and that the OFR is intending to collect data to better understand such funding mechanisms.
- Capital Requirements: Elliott criticized the emphasis on aggregate levels of capital and liquidity and called for more attention to the details and “incentive effects” of regulation that could undermine financial stability. He stated that it “feels like we are in the right ballpark” for total capital, but that he wants a system where “the pieces fit together more easily and fairly.”
Speakers
- Justin Schardin, Financial Regulatory Reform Initiative, Bipartisan Policy Center
- Phillip Swagel, Financial Regulatory Reform Initiative, Bipartisan Policy Center
- Richard Berner, Director, Office of Financial Research
- Douglas Elliott, Partner, Oliver Wyman
- Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce
- Marcus Stanley, Policy Director, Americans for Financial Reform
- Mike Stegman, Fellow, Bipartisan Policy Center
Welcoming Remarks
Justin Schardin and Phillip Swagel of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative opened the event by briefly discussing their recent report, “Did Policymakers Get Post-Crisis Financial Regulation Right?” They described it as an attempt to look back on post-crisis regulations and consider their impacts on consumers and investors, as well as their unintended consequences. Swagel commented that the Dodd-Frank Act is “not perfect” and outlined some of the concerns raised over regulations, namely constraints on access to credit, overly burdensome regulation on small banks, and possibly diminished market liquidity.
Conversation with OFR Director Richard Berner
Gina Chon of Reuters led a discussion with Richard Berner, Director of the Office of Financial Research (OFR). She opened by asking about the current state of the regulatory system. Berner noted that five necessary “tent poles” of regulation have been put in place: improved capital, improved liquidity, stress testing, transparency in derivatives markets, and Orderly Liquidation Authority (OLA). He also highlighted the creation of the OFR, pointing out the need to better understand how the financial system works and to properly measure and track financial activities.
Asked about market liquidity, Berner called it a good example of an area where more information is needed. He said there has been much discussion of whether regulations have diminished liquidity, but that the evidence is “pretty mixed.” Berner also stated that an important part of understanding market liquidity will be studying short-term funding, such as repurchase agreements, and that the OFR is intending to collect data to better understand such funding mechanisms.
Chon asked about the relationship the OFR has with other regulators. Berner answered that the OFR is unique in that it is the only agency charged with looking across the financial system to collect data on behalf of the Financial Stability Oversight Council (FSOC), and that its work is complementary to that of FSOC member agencies.
Berner responded to a question about the quality and quantity of data available to regulators today by first stressing the importance of the Legal Entity Identifier (LEI) in tracking the parties to financial transactions. He also commented that the OFR is collecting information on the bilateral repo market, and that this will be followed by a collection of securities lending data.
Panel Discussion
Chon then moderated a discussion with Mike Stegman, Fellow, Bipartisan Policy Center; Marcus Stanley, Policy Director, Americans for Financial Reform; Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce; and Douglas Elliott, Partner, Oliver Wyman.
Assessing Reforms
Asked to assess the progress made in financial reform since the crisis, Stegman lamented that there has been no comprehensive housing finance reform, and that while consumers have gained protections against abusive practices, access to credit has become too tight. Stanley dismissed some concerns about the economic recovery, and commented that the slow recovery underscores the impact of the financial crisis rather than the consequences of needed reforms.
Quaadman stated that the U.S. Chamber of Commerce’s 2017 agenda includes recommendations for pro-growth regulatory policies that would still provide appropriate oversight of financial institutions. He called for a cumulative impact study of all post-crisis reforms, suggesting that regulators have not clearly identified the problems they have sought to solve when creating new rules.
Capital Levels
Elliott stressed the importance of studying the cumulative impact of regulations and balancing the positives and negatives. He mentioned a report he helped author from Oliver Wyman that studied the aggregate impacts of capital and liquidity regulations and found that funding costs in the U.S. had risen about 120 basis points.
Chon then asked whether current capital levels are adequate. Elliott also criticized the emphasis on aggregate levels of capital and liquidity and called for more attention to the details and “incentive effects” of regulation that could undermine financial stability. He stated that it “feels like we are in the right ballpark” for total capital, but that he wants a system where “the pieces fit together more easily and fairly.”
Quaadman added that even though capital standards are developed through international frameworks, there is not enough coordination. He explained that while European regulators see international standards from the Basel Committee as a ceiling for capital, U.S. regulators have treated them as floors.
Volcker Rule
Asked about the Volcker Rule, Stanley commented that it was driven by a desire to act on bank activities without restoring Glass-Steagall. He said allowing banks to restore proprietary trading would be “a big problem.”
Resolution
Chon asked the panelists about the merits of bankruptcy or OLA as a resolution mechanism. Elliott stated that the current bankruptcy code is not set up to take into account anything beyond the interests of creditors and debtors, and that any scheme must have special features to facilitate the resolution of a complex institution. Stanley argued that the Financial Institution Bankruptcy Act assumes a globally systemic institution can be taken through bankruptcy over a single weekend with no external source of liquidity, and called this “a dangerous fantasy.” He added that a Democratic alternative to the bill is expected to be introduced soon.
For more information on this event, please click here.
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Bipartisan Policy Center
“Did Policymakers Get Post-Crisis Financial Regulation Right?”
Tuesday, December 6, 2016
Key Topics & Takeaways
- Liquidity: OFR Director Berner called market liquidity a good example of an area where more information is needed. He said there has been much discussion of whether regulations have diminished liquidity, but that the evidence is “pretty mixed.” He added that an important part of understanding market liquidity will be studying short-term funding, such as repurchase agreements, and that the OFR is intending to collect data to better understand such funding mechanisms.
- Capital Requirements: Elliott criticized the emphasis on aggregate levels of capital and liquidity and called for more attention to the details and “incentive effects” of regulation that could undermine financial stability. He stated that it “feels like we are in the right ballpark” for total capital, but that he wants a system where “the pieces fit together more easily and fairly.”
Speakers
- Justin Schardin, Financial Regulatory Reform Initiative, Bipartisan Policy Center
- Phillip Swagel, Financial Regulatory Reform Initiative, Bipartisan Policy Center
- Richard Berner, Director, Office of Financial Research
- Douglas Elliott, Partner, Oliver Wyman
- Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce
- Marcus Stanley, Policy Director, Americans for Financial Reform
- Mike Stegman, Fellow, Bipartisan Policy Center
Welcoming Remarks
Justin Schardin and Phillip Swagel of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative opened the event by briefly discussing their recent report, “Did Policymakers Get Post-Crisis Financial Regulation Right?” They described it as an attempt to look back on post-crisis regulations and consider their impacts on consumers and investors, as well as their unintended consequences. Swagel commented that the Dodd-Frank Act is “not perfect” and outlined some of the concerns raised over regulations, namely constraints on access to credit, overly burdensome regulation on small banks, and possibly diminished market liquidity.
Conversation with OFR Director Richard Berner
Gina Chon of Reuters led a discussion with Richard Berner, Director of the Office of Financial Research (OFR). She opened by asking about the current state of the regulatory system. Berner noted that five necessary “tent poles” of regulation have been put in place: improved capital, improved liquidity, stress testing, transparency in derivatives markets, and Orderly Liquidation Authority (OLA). He also highlighted the creation of the OFR, pointing out the need to better understand how the financial system works and to properly measure and track financial activities.
Asked about market liquidity, Berner called it a good example of an area where more information is needed. He said there has been much discussion of whether regulations have diminished liquidity, but that the evidence is “pretty mixed.” Berner also stated that an important part of understanding market liquidity will be studying short-term funding, such as repurchase agreements, and that the OFR is intending to collect data to better understand such funding mechanisms.
Chon asked about the relationship the OFR has with other regulators. Berner answered that the OFR is unique in that it is the only agency charged with looking across the financial system to collect data on behalf of the Financial Stability Oversight Council (FSOC), and that its work is complementary to that of FSOC member agencies.
Berner responded to a question about the quality and quantity of data available to regulators today by first stressing the importance of the Legal Entity Identifier (LEI) in tracking the parties to financial transactions. He also commented that the OFR is collecting information on the bilateral repo market, and that this will be followed by a collection of securities lending data.
Panel Discussion
Chon then moderated a discussion with Mike Stegman, Fellow, Bipartisan Policy Center; Marcus Stanley, Policy Director, Americans for Financial Reform; Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce; and Douglas Elliott, Partner, Oliver Wyman.
Assessing Reforms
Asked to assess the progress made in financial reform since the crisis, Stegman lamented that there has been no comprehensive housing finance reform, and that while consumers have gained protections against abusive practices, access to credit has become too tight. Stanley dismissed some concerns about the economic recovery, and commented that the slow recovery underscores the impact of the financial crisis rather than the consequences of needed reforms.
Quaadman stated that the U.S. Chamber of Commerce’s 2017 agenda includes recommendations for pro-growth regulatory policies that would still provide appropriate oversight of financial institutions. He called for a cumulative impact study of all post-crisis reforms, suggesting that regulators have not clearly identified the problems they have sought to solve when creating new rules.
Capital Levels
Elliott stressed the importance of studying the cumulative impact of regulations and balancing the positives and negatives. He mentioned a report he helped author from Oliver Wyman that studied the aggregate impacts of capital and liquidity regulations and found that funding costs in the U.S. had risen about 120 basis points.
Chon then asked whether current capital levels are adequate. Elliott also criticized the emphasis on aggregate levels of capital and liquidity and called for more attention to the details and “incentive effects” of regulation that could undermine financial stability. He stated that it “feels like we are in the right ballpark” for total capital, but that he wants a system where “the pieces fit together more easily and fairly.”
Quaadman added that even though capital standards are developed through international frameworks, there is not enough coordination. He explained that while European regulators see international standards from the Basel Committee as a ceiling for capital, U.S. regulators have treated them as floors.
Volcker Rule
Asked about the Volcker Rule, Stanley commented that it was driven by a desire to act on bank activities without restoring Glass-Steagall. He said allowing banks to restore proprietary trading would be “a big problem.”
Resolution
Chon asked the panelists about the merits of bankruptcy or OLA as a resolution mechanism. Elliott stated that the current bankruptcy code is not set up to take into account anything beyond the interests of creditors and debtors, and that any scheme must have special features to facilitate the resolution of a complex institution. Stanley argued that the Financial Institution Bankruptcy Act assumes a globally systemic institution can be taken through bankruptcy over a single weekend with no external source of liquidity, and called this “a dangerous fantasy.” He added that a Democratic alternative to the bill is expected to be introduced soon.
For more information on this event, please click here.