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February 2017
FINANCIAL DEREGULATION:
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Acknowledgments TheauthorswouldliketothankJonathonAdams-Kane,KeithSavard,andJakobWilhelmusforhelpfuldiscussionsrelatedtothispaper.
About the Milken Institute TheMilkenInstituteisanonprofit,nonpartisanthinktankdeterminedtoincreaseglobalprosperitybyadvancingcollaborativesolutionsthatwidenaccesstocapital,createjobs,andimprovehealth.Wedothisthroughindependent,data-drivenresearch,action-orientedmeetings,andmeaningfulpolicyinitiatives.©2017MilkenInstituteThisworkismadeavailableunderthetermsoftheCreativeCommonsAttribution-NonCommercial-NoDerivs3.0UnportedLicense,availableathttp://creativecommons.org/licenses/by-nc-nd/3.0/
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Financial Deregulation: Repeal or Adjust?
ClaudeLopezandElhamSaeidinezhad1
WhileamajoroverhaulofU.S.financialregulationmaybeunlikelyduringtheearlymonthsoftheTrumpadministration,changesshouldbeexpectedashisnomineestoleadtheTreasuryDepartmentandfinancialregulatoryagenciesareconfirmed.Thiswillbethebiggestturnoverinregulatoryleadershipsincethepassagein2010oftheDodd-FrankAct,anditmayprovetobeatestforBaselIII,themacroprudentialpolicyframeworkcreatedbytheG20countriesinresponsetothe2007-2008financialcrisis.
Dodd-Frank,whichhasneverbeenfullyimplemented,isthelegislativevehicleforU.S.integrationofBaselIIIrecommendations.2Theactaimstolimitsystemicrisk,allowforthesaferesolutionofthelargestintermediaries,increasescrutinyofriskynonbanks,andreformderivativestrading.TheFinancialChoiceAct,introducedintheU.S.HouseofRepresentativeslastyearasanalternativetoDodd-Frank,proposessignificantchangesinfinancialregulation.AlthoughitisunlikelythattheFinancialChoiceActwillpass,itisconsideredbymanytobetheblueprintfortheregulatoryrevisionstocome.3
Theremaybeuncertaintyaboutwhatwillbechangedandwhen,butthereisnodoubtthattherewillbeturnoveramongseniorstaffatregulatoryagencies.InadditiontoPresidentTrump’sappointmentstoleadtheTreasuryDepartment,theSecuritiesandExchangeCommission(SEC),andtheCommoditiesFuturesTradingCommission(CFTC),theincomingadministrationwillbeabletonominatenewheadsofthebankingauthorities,namelytheOfficeoftheComptrolleroftheCurrency(OCC),theFederalDepositInsuranceCorp.(FDIC),andtheFederalReserveBoardofGovernors,allwithinthenext18months.
Morespecifically,threenewcommissioners,themaximumallowedfromanyonepoliticalparty,willbenominatedforboththeSECandtheCFTC.ThetermsforcurrentleadershipoftheOCC,theFDICandtheFederalReserveexpireinApril2017,November2017,andFebruary2018,respectively.ThekeypositionofvicechairmanforsupervisionalsoisvacantattheFed.4(ThedirectorsoftheOCCandtheConsumerFinancialProtectionBoard[CFPB]serveontheFDIC’sboard.5)
ThediagrambelowprovidesanoverviewoftheU.S.financialregulatorystructure.Itshowsthatthesechangeswillaffecttheentirefinancialsector,includingbanks,insurancecompanies,financialmarketutilities(FMUs),andsecuritiesmarkets.Furthermore,sevenofthe10votingmembersoftheFinancial
1ClaudeLopez,PhD,leadstheInternationalFinanceandMacroeconomicsresearchteamattheMilkenInstitute.ElhamSaeidinezhad,PhD,isaresearcheconomistonthisteam.2Seehttp://www.milkeninstitute.org/publications/view/812formoredetailsontheDodd-FrankAct.3Theregulatoryeasingconcernsonlypartoftheregulatoryframework.Nochangeinstanceisexpectedregardingtheanti-moneylaundering(AML)regulations.4ThetermofthevicechairmanoftheFederalReserveBoardendsinJune2018.5TheCFPBdirector’stermexpiresinJuly2018.
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StabilityOversightCouncil(FSOC),whichcoordinatesU.S.macroprudentialpolicy,willbereplaced.Thesenewregulatorswillhavesubstantialauthority,bothasindividualagencychiefsandasmembersoftheFSOC,tochangethewayDodd-Frankisapplied.TheycandothiswithoutgoingthroughCongressoreventheirownformalrule-makingprocesses.Forexample,agencychiefscanchangeenforcementprioritiesby“amendingorrescindingandreplacingrelatedguidance,suchasinterpretationsofrules,internalpoliciesandmanuals.”6UnliketherepealofDodd-Frankorarulechange,anewdirectioninguidanceandinterpretationcanbeorderedandimplementedalmostimmediately.
Diagram: Overview of the U.S. Financial Regulatory Structure Sector CorrespondingRegulators
DepositoryInstitutions(DomesticandForeign)
FRB OCC FDIC StateBankingSupervisors
PaymentSystemandOtherFMUs
FRB SEC CFTC
ConsumerProtectionIssues
CFPB FRB FDIC
InsuranceProducts
AnInsuranceExpertAppointedbythePresident
AStateInsuranceRegulator
FIO
SecuritiesandBondProducts SEC
AStateSecuritiesCommissioner
Securities-basedSwaps SEC
Non-Securities-BasedSwaps CFTC
Government-sponsoredenterprises
FHFA
CreditUnions NCUA
6Seehttp://www.capmktsreg.org/wp-content/uploads/2016/11/NBTF_Regulatory_Reform_.pdf
U.S.Treasury(Chairperson)CFPB:ConsumerFinancialProtectionBureauCFTC:CommoditiesFuturesTradingCommissionFDIC:FederalDepositInsuranceCorporationFHFA:FederalHousingFinanceAgencyFRB:FederalReserveBoardNCUA:NationalCreditUnionAdministrationOCC:OfficeoftheComptrolleroftheCurrencySEC:SecuritiesandExchangeCommissioninsuranceexpertFIO:FederalInsuranceOfficeAstateinsuranceregulatorAstatebankingsupervisorAstatesecuritiescommissioner
FSOCNon-Votingmembers:
FSOCVotingMembers
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Inlightoftheleadershipoverhaulattheregulatoryagencies,theblueprintdefinedbytheFinancialChoiceAct,andthesoftertoneregardingDodd-Frankrevamping,theincomingadministrationmayfirstfocusonchangesthatwouldprovideregulatoryrelieftothefinancialsectorwithoutalteringtheformalrules.Inthatcontext,thefollowingarepotentialtargetsforearlychange:
• TheFSOC’sauthoritytodesignate“systemicallyimportant”nonbankinstitutions(FMUs,includingclearingorganizationsandpaymentsystems,andnonbankfinancialcompanies)hasbeencriticizedandchallenged,mostnotablyintheFSOC'srecisionofGECapital'sdesignationassystemicallyimportantlastyear.NewvotingFSOCmembersmaysimplychoosenottodesignatenewsystemicallyimportantfinancialinstitutions(SIFIs)andreverseexistingdesignations.Asaresult,nonbankcompanieswouldnolongerbesubjecttoenhancedFedsupervision.TheFSOCmayalsoshiftitsattentionawayfromassetmanagerstofocusonstreamliningregulationsacrossagenciesinsteadofcreatingnewregulations.
• TheSECandtheCFTCarelikelytolimitthescopeoffuturesecuritiesregulations.Thisincludescurrenteffortstoregulatehigh-frequencytradingandsecurity-basedswaps.Furthermore,theissuanceoffiduciaryrulesforfinancialadvisersandrulesforassetmanagerstresstestingwillnotremainapriorityfortheSEC.7Bothagenciesmayemphasizepenaltiesagainstindividualsratherthanagainstcorporationsinanefforttoholdindividualsaccountable.Theresultwouldbemorecivilandcriminalprosecutionsforfraudandself-dealing.
• TheFDICiscurrentlythe“orderlyliquidationauthority”underTitleIIofDodd-Frankand,assuch,itcantheoreticallyliquidateaSIFIindifficultyoutsideofthenormalbankruptcycode.However,theFDICcanactonlyafterthesecretaryofthetreasurydecidestoplacetheSIFIunderFDICreceivership.Thisprocedurehasneverbeenused,anditseemsratherunlikelythatitwillbeunderthenewadministration.ThepotentialamendmentofthefederalbankruptcycodetofacilitateprocedureswhenitcomestoSIFIsisdirectlyrelatedtothispoint.
• BankingorganizationsmaybenefitfromanincreaseinDodd-Frank’s$50billionassetthreshold,whichautomaticallydesignatesthemasSIFIsandsubjectsthemtohighersupervisionstandards.8TheFedproposedinSeptember2016toexemptthecapitalplansofsmallerbanksfromscrutinytestingunderComprehensiveCapitalAnalysisandReview(CCAR)stresstestingandresolutionplanning.9Theincreaseinthethresholdhasbipartisansupport;however,itwouldhavelimitedimpactbecausebankingagencieshavealreadyeasedregulatorypressureforbankswithlessthan$100billioninassets.10
7Onasimilarnote,theDepartmentofLabor’s(DOL)fiduciarydutyrulewilllikelysurvivebutmayencountersignificantdelayinitsimplementation.8ABankingOrganizationisdefinedtoinclude1)insureddepositoryinstitutions2)bankholdingandsavingsandloancompaniesand3)allcompaniesthataretreatedasbankholdingcompaniesundertheInternationalBankingAct.9Seehttps://www.federalregister.gov/documents/2016/09/30/2016-23629/amendments-to-the-capital-plan-and-stress-test-rules10Seehttps://www.federalreserve.gov/newsevents/speech/tarullo20140508a.htm
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Similareasingseemsratherunlikelyforthelargestbanksintheshortterm,buttheymaybenefitfrompotentialchangesorfurtherdelayintheimplementationoftheVolckerRule’slimitsonproprietarytrading.Concernsregardingtherule’scomplexityaswellasitsimpactonmarketliquidityarewidespread,whichmayexplaintherecurringpostponementofitsfullimplementation.ThenewdeadlineforconformanceisJuly2017.
• TheCFPB’sleadershipstructurehasoftenbeencalledintoquestion,especiallysinceNovember2016,whenafederalcourtruleditunconstitutionalbecauseitssingledirectorcanberemovedonly“forcause”duringhisfive-yearterm.ChangeswillbelikelyiftheCFPB’sappealfails.
Tosumup,morethansixyearsaftertheadventofDodd-Frank,manyarecallingforareassessmenttoeasetheburdenitplacesonfinancial-servicescompanies,especiallybanks.Thesoftenedrhetoricofthenewadministrationisquitedifferentfromtheaggressivecallsforrepealthatwerecommonduringthecampaign,andsuggestsamoresubtleapproachtoregulatorychange.Thisnewtackalsoismoreinlinewiththebroaderinternationaldebate.ThepressureforregulatorychangeisnotconfinedtotheU.S.ThelatestdelaysinthefinalizationofBaselIII’sbankingrulesshowthatthepost-crisisregulatoryframeworkitselfisunderscrutiny.11
11TheGroupofCentralBankGovernorsandHeadsofSupervision(GHOS),theoversightbodyoftheBaselCommitteeonBankingSupervision,postponedaJan.8meetingduetodisagreementovernewcapitalrequirementsforlenders.