US Must Remain Engaged with Global Standard Setters

May 19, 2017

In two weeks, the Treasury Department will release the first of what will be a number of reports on how the current regulatory regime meets the Administration’s Core Principles

After eight years of regulatory reform, we agree that now is the right time to assess the work that’s been done and ensure the regulatory framework put in place balances the need for systemic stability and economic growth.

One of the Administration’s key principles seeks to “advance American interests in international financial regulatory negotiations and meetings.” This specifically references U.S. government engagement with bodies such as the Basel Committee on Banking Supervision, the Financial Stability Board and the International Association of Insurance Supervisors, among others.

We support continued U.S. engagement with these institutions, which help to support global financial stability and also ensure that firms doing business globally operate off a consistent set of rules. We also support reforms to ensure greater transparency by global standard setters.

Institutions like the FSB and the Basel Committee have contributed enormously to making our financial system safer, sounder and more robust through the development of a sound global regulatory framework.

  • Globally, banks have raised more than $3.7 trillion in capital since 2008, and GSIBs alone have raised more than $1 trillion. These firms have also completely transformed their funding profiles away from risky short-term wholesale funding strategies.
  • We have the leverage ratio as a backstop capital measure and an overall reduction in bank leverage.
  • Resolution regimes, coupled with living wills, are now in place, ensuring the recovery of a firm in trouble or-- if needed-- its orderly resolution, avoiding the creation of further systemic risk.
  • Banks are now required to hold total loss absorbing capacity-or TLAC, which everyone agrees is an essential tool to avoid financial crises and in ending too-big-to-fail.

Global standard setters make positive and important contributions across all economies, from large developed markets to emerging market (EM) economies. Benefits include:

  • supporting the flow of capital to investment opportunities;
  • promoting greater and more fair competition; and
  • promoting better pricing and services for borrowers and end-users.

However, at a time when some question the need for global approaches and the necessity of these bodies, it is time for the Basel Committee, the FSB and other global bodies to undertake reforms in the way they develop and adopt new policies.

Global standard setters should improve their transparency and conduct more rigorous cost/benefit analyses—both ahead of adopting new regulations and on a post-implementation basis. Such analyses are essential in order to identify any potential unintended consequences of regulations and to fine-tune and adjust if necessary some of the policies produced during the last eight years.

For more on this topic, I encourage you to read this report by my colleagues Brad Carr and Matt Ekberg. It highlights the beneficial roles that international standard-setting bodies play in the global economy, and suggests additional areas of potential reform so that these bodies can continue their contributions more effectively.

It's Time For A Review Of Regulations, But Which Ones?

April 27, 2017

In February, President Donald Trump signed an Executive Order requiring the review of financial regulation to assess its impact on stability and growth. This review is wide in scope and has signaled to the financial sector and its customers that the Administration plans to possibly recalibrate rules to spur more economic activity. Beyond the Executive Order, there is also a larger conversation on the role of the U.S. at international standard setting bodies, which have adopted new capital, liquidity, and resolution strategies since the crisis.

Below is a question & answer session with IIF President & CEO Tim Adams on the regulatory review process underway.

After eight years of regulatory reform, have we struck the balance between growth and financial stability?

Undoubtedly, post-crisis regulations -- along with commitments by the industry -- have made our financial system far safer and sounder.

Globally, banks have raised more than $3.7 trillion in capital since 2008, and GSIBs alone have raised more than $1 trillion. We have the leverage ratio as a backstop capital measure and an overall reduction in bank leverage. Resolution regimes, coupled with living wills, are now in place and banks are now required to hold total loss absorbing capacity-or TLAC, something that Bank of England Governor Mark Carney has said is an essential tool in ending too-big-to-fail.

After 8 years of transformational change for the industry, now is the right time to take a pause and assess the work that’s been done and see where rules are unnecessarily hurting the ability of financial institutions to lend and spur economic growth and job creation.

What are the areas where a recalibration or a second look would be most helpful?

First and foremost, we support risk-sensitive capital requirements and appropriate liquidity rules. Moving to a more simplistic capital measure—such as relying solely on a leverage ratio—would ultimately force banks into holding riskier assets to ensure a sufficient return on equity. Having a risk-based capital framework makes banks safer.  

The CCAR process—better known as the Fed’s stress tests—should be reformed. The process needs to be more transparent and more reliant on quantitative factors. There should also be a better understanding of the interaction between financial stability and availability of credit.

We also believe that FSOC should revise its designation criteria for non-bank financial institutions to bring more transparency to the process and should focus more on activities rather than entities. 

The Volcker rule could also be tweaked and clarified to ensure that it accurately captures private equity investments and true proprietary trading but does not disallow other fund investments and firms’ ability to make markets behalf of clients.

One area policy makers are re-thinking is Title II in Dodd-Frank, which provides regulators with the authority to takeover and wind-down a failing large bank. Where does IIF stand on this issue?

We believe Title II and Orderly Liquidation Authority should be maintained.

As Treasury Secretary Steve Mnuchin put it at our Washington Policy Summit last week, our current bankruptcy code does not support winding down a large failing bank. Title II was a solution to this problem, maintaining bipartisan support when Dodd-Frank passed.

Whatever progress could be made under the Bankruptcy Code to facilitate a SIFI’s failure, there will be at least some cases where the government will need these resolution tools in crisis situations. Eliminating Title II returns us to the same position we were in 2008 -- lacking the tools to navigate a financial crisis.

How would eliminating Title II effect global banking?

For globally active banks, Title II laid the groundwork for cross-border coordination on resolution planning. If Title II were to be repealed, the ability of foreign authorities to count on well-coordinated resolution planning with U.S. authorities would be destroyed. As a result, U.S. banks operating abroad are likely to face much more draconian ring-fencing and supervision requirements. Some form of secured emergency liquidity assistance to failing financial institutions must be available as a standby in any major resolution. These facilities are totally different from an equity bail-out by the government, and serve to protect the entire economy from instability.

How should the new Administration view global standard-setting bodies?

The United States should continue to support and remain actively engaged with global standard setting bodies like the Basel Committee, the Financial Stability Board, IOSCO and the IAIS.

Large, globally-active financial institutions should operate under a common, consistent rulebook as capital moves around the world. A more fragmented, regionally-focused approach to regulation traps capital, inhibits cross-border capital flows and makes the global financial system more brittle and potentially unstable.

These bodies serve a vital role in the global financial system and for economic growth, but they need to reform themselves.

They need to be more transparent and accountable. For example, during the consultation process they should show the rationale and explanations for their decisions in final standards. They also need to continue efforts to rigorously test the costs and benefits of the standards they propose. 

Travel Log

 Where Tim has been this year.