Bipartisan Policy Center – Launch of Financial Regulatory Reform Initiative
AT A BIPARTISAN POLICY CENTER EVENT, the Financial Regulatory Reform Initiative was launched. The goal of the Initiative is to produce bipartisan consensus reforms to the financial regulatory system and is comprised of former regulators and senior policy makers from both parties. The first panel consisted of the Director and Co-Chairs of the Initiative and the second featured the Reform Task Force.
Bipartisan Policy Center Launches Financial Regulatory Reform Initiative
Senator Mark Warner
Senator Mark Warner’s opening speech stated that the Dodd-Frank Act has improved the health of American financial institutions. He admitted that parts of the Act will require corrective legislative action, but said repealing it would be extremely disruptive to markets. Notably, Warner said there is a need for regulatory agencies to be rationalized and consolidated. With regard to the Financial Stability Oversight Council (FSOC), Warner said that the agency is not living up to its role of an independent arbiter of conflicting regulators.
Warner also raised concern with the classification of institutions as systemically important, but “categorically disagrees” with those who say Dodd-Frank institutionalized “too big to fail.” Warner explained that if bankruptcy is not possible for a bank, a “painful” resolution process would be imposed consisting of shareholders and managers being wiped out, claw backs on assets, and haircuts based on contract law. Although in some cases, parts of an institution could be maintained to ensure market stability until an orderly dissolution was achieved. Warner added that regulations should be imposed based on size and function of an institution. He believes that only after the “fiscal cliff” is resolved will Congress go back and make changes to Dodd-Frank.
Q&A
When asked why he supported a committee vote on the Independent Regulatory Analysis Act, Warner said he did not see a distinction between cost benefit analyses between executive agencies vs. independent agencies. He does, however, fear the potential of agencies becoming politicized and thinks they should be separate entities from administrations. He noted a need for retrospective review on certain policies to find out if they accomplished their goals.
Warner was asked whether unintended regulatory consequences would result from the combination of Basel III and Dodd-Frank, including an increased number of shadow banks and an increased regulatory burden on small banks. He said that fears of having more bad actors had been extensively discussed, but no real solutions were presented. He added that evidence of small banks being “crushed” by regulation is lacking, and the policy did not intend to impose the same regulations on small and large firms.
Finally, Warner was asked to provide his thoughts on the fiscal cliff. He responded that Congress should not “kick the can down the road,” noting that addressing the nation’s fiscal problems cannot be met solely through tax deduction eliminations and that a solution will have to be bipartisan. He said he is pleased by the recent support of the business community, and thinks the chances of avoiding sequester are above 80%.
First Panel
The Moderator of the first panel, Shahien Nasiripour of the Financial Times, asked to what degree a slowdown in growth can be accepted to ensure financial stability. Dr. Philip Swagel, former chief economist to Secretary Paulson, stressed the need not to stifle financial innovation, stating that the effects of regulation only become apparent over time. Dr. Martin Baily, former chief economist to President Clinton, said there was “slack” in the market that can be exploited by reform. However, he noted that there was a misallocation of capital in the housing bubble that tighter regulation could have prevented. Aaron Klein, the Director of the Financial Regulatory Reform Initiative, affirmed the view that promotion of stability and growth is always good, but regulation that may cause growth to slow should be carefully judged.
When asked if a financial system consisting of a few big institutions was better than a system with many small ones, Baily responded that the optimal distribution of banks may not currently exist, but said no good case to break up large banks existed. Swagel stated that diversity is good, and that both large and small banks play an important role in the financial industry.
Panelists were asked if U.S. banks should seek to grab greater market share and purchase assets of European banks that are retrenching or if they should be limited in doing so. Baily replied that banks, as well as hedge funds, should not be limited, but that it may not be in their best interests to buy these risky assets. Swagel agreed that U.S. institutions should not be handicapped but may not obtain benefits for expanding into the European market.
When asked whether too much liquidity is a bad thing, Klein said that more liquidity is not always good, but noted that a lack of liquidity has proven to be very dangerous. Baily noted that there are different definitions of liquidity, stating that the kind referring to savings and foreign funding can be a bad thing for the economy, if there is too much of it. This excess liquidity caused an overabundance of demand for mortgage-backed securities that helped fuel the housing bubble which lead to the crisis. However, liquidity that allows portfolios to balance and markets to be made is essential to the proper functioning of the financial system and without proper levels of it foreign trade can completely freeze, Baily added.
Finally, panelists were asked if agencies have the capability to manage the regulation of systemically important institutions. Baily stressed that regulators cannot do it all on their own and that there must be market incentives in place to motivate firms to self-police and have a vested interest in avoiding risk.
The Financial Regulation Reform Task Force gave their views on regulatory reform up to this point. Annette Nazareth stated that there was a lost opportunity by not restructuring the regulatory bodies. However, she noted that the costs and weight of the agencies may drive consolidation moving forward.
Richard Neiman stated that regulation should continue to be built on a strong historical foundation and that a clean slate should not be sought out. He noted, the new agencies must have clearly defined roles and objectives to avoid overlap with other agencies and work within a framework of checks and balances to avoid regulatory capture.
Rodgin Cohen noted that Title II of Dodd-Frank, which deals with Orderly Resolution Authority, was a superb example of bipartisanship and, while not being perfect, went a long way in reducing systemic risk.
Chuck Muckenfuss explained that there was early support for a merger of the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), but it never got off the ground.
John Bovenzi stated that there are extreme views on both sides of the Title II argument and that the truth lies somewhere in the middle. He notes that the issue of “too big to fail” has not been completely solved and there still exists a need to eliminate the possibility of a systemic meltdown. He said that talk of breaking up banks reflects a lack of trust in living wills and that further review of the bankruptcy code should be conducted to possibly create a new Chapter 14 bankruptcy code to address its shortcomings.
Randall Guynn voiced his concerns that Dodd-Frank leaves many questions unanswered. First, that it creates the tools needed to impose losses on equity holders and creditors without posing a risk to overall market stability. Next, there is question of what the outcome will be of using these tools. He feels the special resolution provisions given to the Federal Deposit Insurance Corporation (FDIC) are too open ended and that Congress should restrict them. He explained that Title II cannot be invoked unless bankruptcy provisions do not work. Thus, more focus should be turned to bankruptcy code so that Title II can be avoided. Lastly, he said policies and procedures need to be clearly defined to bring certainty and stability to the markets, while ensuring that in the event of a failure, losses are imposed on equity holders and creditors and not taxpayers.
(To view a webcast of the event please click here.)
AT A BIPARTISAN POLICY CENTER EVENT, the Financial Regulatory Reform Initiative was launched. The goal of the Initiative is to produce bipartisan consensus reforms to the financial regulatory system and is comprised of former regulators and senior policy makers from both parties. The first panel consisted of the Director and Co-Chairs of the Initiative and the second featured the Reform Task Force.
Bipartisan Policy Center Launches Financial Regulatory Reform Initiative
Senator Mark Warner
Senator Mark Warner’s opening speech stated that the Dodd-Frank Act has improved the health of American financial institutions. He admitted that parts of the Act will require corrective legislative action, but said repealing it would be extremely disruptive to markets. Notably, Warner said there is a need for regulatory agencies to be rationalized and consolidated. With regard to the Financial Stability Oversight Council (FSOC), Warner said that the agency is not living up to its role of an independent arbiter of conflicting regulators.
Warner also raised concern with the classification of institutions as systemically important, but “categorically disagrees” with those who say Dodd-Frank institutionalized “too big to fail.” Warner explained that if bankruptcy is not possible for a bank, a “painful” resolution process would be imposed consisting of shareholders and managers being wiped out, claw backs on assets, and haircuts based on contract law. Although in some cases, parts of an institution could be maintained to ensure market stability until an orderly dissolution was achieved. Warner added that regulations should be imposed based on size and function of an institution. He believes that only after the “fiscal cliff” is resolved will Congress go back and make changes to Dodd-Frank.
Q&A
When asked why he supported a committee vote on the Independent Regulatory Analysis Act, Warner said he did not see a distinction between cost benefit analyses between executive agencies vs. independent agencies. He does, however, fear the potential of agencies becoming politicized and thinks they should be separate entities from administrations. He noted a need for retrospective review on certain policies to find out if they accomplished their goals.
Warner was asked whether unintended regulatory consequences would result from the combination of Basel III and Dodd-Frank, including an increased number of shadow banks and an increased regulatory burden on small banks. He said that fears of having more bad actors had been extensively discussed, but no real solutions were presented. He added that evidence of small banks being “crushed” by regulation is lacking, and the policy did not intend to impose the same regulations on small and large firms.
Finally, Warner was asked to provide his thoughts on the fiscal cliff. He responded that Congress should not “kick the can down the road,” noting that addressing the nation’s fiscal problems cannot be met solely through tax deduction eliminations and that a solution will have to be bipartisan. He said he is pleased by the recent support of the business community, and thinks the chances of avoiding sequester are above 80%.
First Panel
The Moderator of the first panel, Shahien Nasiripour of the Financial Times, asked to what degree a slowdown in growth can be accepted to ensure financial stability. Dr. Philip Swagel, former chief economist to Secretary Paulson, stressed the need not to stifle financial innovation, stating that the effects of regulation only become apparent over time. Dr. Martin Baily, former chief economist to President Clinton, said there was “slack” in the market that can be exploited by reform. However, he noted that there was a misallocation of capital in the housing bubble that tighter regulation could have prevented. Aaron Klein, the Director of the Financial Regulatory Reform Initiative, affirmed the view that promotion of stability and growth is always good, but regulation that may cause growth to slow should be carefully judged.
When asked if a financial system consisting of a few big institutions was better than a system with many small ones, Baily responded that the optimal distribution of banks may not currently exist, but said no good case to break up large banks existed. Swagel stated that diversity is good, and that both large and small banks play an important role in the financial industry.
Panelists were asked if U.S. banks should seek to grab greater market share and purchase assets of European banks that are retrenching or if they should be limited in doing so. Baily replied that banks, as well as hedge funds, should not be limited, but that it may not be in their best interests to buy these risky assets. Swagel agreed that U.S. institutions should not be handicapped but may not obtain benefits for expanding into the European market.
When asked whether too much liquidity is a bad thing, Klein said that more liquidity is not always good, but noted that a lack of liquidity has proven to be very dangerous. Baily noted that there are different definitions of liquidity, stating that the kind referring to savings and foreign funding can be a bad thing for the economy, if there is too much of it. This excess liquidity caused an overabundance of demand for mortgage-backed securities that helped fuel the housing bubble which lead to the crisis. However, liquidity that allows portfolios to balance and markets to be made is essential to the proper functioning of the financial system and without proper levels of it foreign trade can completely freeze, Baily added.
Finally, panelists were asked if agencies have the capability to manage the regulation of systemically important institutions. Baily stressed that regulators cannot do it all on their own and that there must be market incentives in place to motivate firms to self-police and have a vested interest in avoiding risk.
The Financial Regulation Reform Task Force gave their views on regulatory reform up to this point. Annette Nazareth stated that there was a lost opportunity by not restructuring the regulatory bodies. However, she noted that the costs and weight of the agencies may drive consolidation moving forward.
Richard Neiman stated that regulation should continue to be built on a strong historical foundation and that a clean slate should not be sought out. He noted, the new agencies must have clearly defined roles and objectives to avoid overlap with other agencies and work within a framework of checks and balances to avoid regulatory capture.
Rodgin Cohen noted that Title II of Dodd-Frank, which deals with Orderly Resolution Authority, was a superb example of bipartisanship and, while not being perfect, went a long way in reducing systemic risk.
Chuck Muckenfuss explained that there was early support for a merger of the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), but it never got off the ground.
John Bovenzi stated that there are extreme views on both sides of the Title II argument and that the truth lies somewhere in the middle. He notes that the issue of “too big to fail” has not been completely solved and there still exists a need to eliminate the possibility of a systemic meltdown. He said that talk of breaking up banks reflects a lack of trust in living wills and that further review of the bankruptcy code should be conducted to possibly create a new Chapter 14 bankruptcy code to address its shortcomings.
Randall Guynn voiced his concerns that Dodd-Frank leaves many questions unanswered. First, that it creates the tools needed to impose losses on equity holders and creditors without posing a risk to overall market stability. Next, there is question of what the outcome will be of using these tools. He feels the special resolution provisions given to the Federal Deposit Insurance Corporation (FDIC) are too open ended and that Congress should restrict them. He explained that Title II cannot be invoked unless bankruptcy provisions do not work. Thus, more focus should be turned to bankruptcy code so that Title II can be avoided. Lastly, he said policies and procedures need to be clearly defined to bring certainty and stability to the markets, while ensuring that in the event of a failure, losses are imposed on equity holders and creditors and not taxpayers.
(To view a webcast of the event please click here.)