Systemic Risk Council Comments on the Treasury Department's June 2017 Report

WASHINGTON--(BUSINESS WIRE)--On September 19, 2017, the Systemic Risk Council submitted a comment letter to the United States Department of Treasury (UST) on its Report of June 2017 on possible reforms to banking-system regulation.

The Council believes that “the UST Report includes a number of worthwhile technical reforms and addresses important issues that are largely incidental to stability, but [is] concerned that some of the Report’s main recommendations would jeopardize the resilience of the financial system, the public finances and the welfare of citizens.”

The Council assessed the UST’s proposals against what it believes are five core pillars of the post-crisis reforms to make the financial system resilient (see Notes for Editors). Its main points are:

• Financial Stability Oversight Council (FSOC) Powers. The Council supports the UST’s desire to make the rule-making process more efficient when multiple regulatory agencies are involved. To that end, the Council recommends that FSOC should be given the power to appoint a lead agency to draft a rule and respond to comments and, where necessary, a power to sign off on the rule itself.
• Federal Deposit Insurance Corporation (FDIC). Contrary to the UST Report, the FDIC should maintain authority, alongside the Federal Reserve, for oversight and regulation of intermediaries’ Living Wills.
• Title II of Dodd-Frank. Title II of Dodd-Frank, creating a special resolution regime for large and complex financial intermediaries, alongside bankruptcy, should be retained.
• Off-Ramp for Large and Complex Banking Institutions. The Council believes that it is not possible to develop a single simple regulatory metric that would pass the test of time and withstand regulatory arbitrage. For that reason, it opposes exempting large and complex firms from other prudential regulations if they exceed a specified leverage ratio.
• Supplementary Leverage Ratio (SLR). The Council worries that the UST Report proposal excluding certain types of assets from total assets in the SLR would prove to be the thin end of a very thick wedge.
• Streamlining Stress Testing. The Council shares the UST desire to avoid making stress testing overly complicated, but it opposes the proposals to restrict stress testing to a biennial timetable and to restructure it as a form of rule-making.
• Office of Financial Research (OFR). The Council is concerned that if OFR were to become a regular part of Treasury, its analysis of financial system vulnerabilities would be likely to wither as the priorities and interests of successive Treasury Secretaries shift away from stability.

The full text of the letter is available here.

Notes for Editors:

(1)

The independent, non-partisan Systemic Risk Council (www.systemicriskcouncil.org) was formed to monitor and encourage regulatory reform of U.S. and global capital markets, with a focus on systemic risk. The Council is funded by the CFA Institute, a global association of more than 125,000 investment professionals who put investors’ interests first and set the standard for professional excellence in finance. The statements, documents and recommendations of the private sector, volunteer Council do not necessarily represent the views of the CFA Institute. The Council works collaboratively to seek agreement on each of its recommendations.

(2)

The five core pillars of system resilience that the Council underscored in its letter to G20 Finance Ministers and Governors at the beginning of this year are:

• Mandating much higher common tangible equity in banking groups to reduce the probability of failure, with individual firms required to carry more equity capital, the greater the social and economic consequences of their failure;
• Requiring banking-type intermediaries to reduce materially their exposure to liquidity risk;
• Empowering regulators to adopt a system-wide view through which they can ensure the resilience of all intermediaries and market activities, whatever their formal type, that are materially relevant to the resilience of the system as a whole;
• Simplifying the network of exposures among intermediaries by mandating that, wherever possible, derivatives transactions be centrally cleared by central counterparties that are required to be extraordinarily resilient; and
• Establishing enhanced regimes for resolving financial intermediaries of any kind, size, or nationality so that, even in the midst of a crisis, essential services can be maintained to households and businesses without taxpayer solvency support—a system of bailing-in bondholders rather than of fiscal bailouts.

See Systemic Risk Council below. For more information please contact Bristol Voss at [phone] or [e-mail] or David Evanson at 215-460-8149 or [e-mail].

Systemic Risk Council Membership

Chair:	Sir Paul Tucker, Fellow, Harvard Kennedy School and Former Deputy Governor of the Bank of England
Chair Emeritus:	Sheila Bair, President of Washington College and Former Chair of the FDIC
Senior Advisor:	Jean-Claude Trichet, Former President of the European Central Bank
Senior Advisor:	Paul Volcker, Former Chair of the Federal Reserve Board

Members:

Brooksley Born, Former Chair of the Commodity Futures Trading Commission

Baroness Sharon Bowles, Former Member of European Parliament and Former Chair of the Parliament’s Economic and Monetary Affairs Committee

Bill Bradley, Former U.S. Senator

William Donaldson, Former Chair of the Securities and Exchange Commission

Peter R. Fisher, Tuck School of Business at Dartmouth, Former Under Secretary of the Treasury for Domestic Finance

Jeremy Grantham, Co-Founder and Chief Investment Strategist, Grantham May Van Otterloo

Richard Herring, The Wharton School, University of Pennsylvania

Simon Johnson, Massachusetts Institute of Technology, Sloan School of Management

Jan Pieter Krahnen, Chair of Corporate Finance at Goethe-Universität in Frankfurt and Director of the Centre for Financial Studies

Sallie Krawcheck, Chair, Ellevate, Former Senior Executive, Citi and Bank of America Wealth Management

Lord John McFall, Former Chair, UK House of Commons Treasury Committee

Ira Millstein, Senior Partner, Weil Gotshal & Manges LLP

Paul O’Neill, Former Chief Executive Officer, Alcoa, Former U.S. Secretary of the Treasury

John Reed, Former Chairman and CEO, Citicorp and Citibank

Alice Rivlin, Brookings Institution, Former Vice-Chair of the Federal Reserve Board

Kurt Schacht, Managing Director, Standards and Advocacy Division, CFA Institute

Chester Spatt, Tepper School of Business, Carnegie Mellon University, Former Chief Economist, Securities and Exchange Commission

Lord Adair Turner, Former Chair of the UK Financial Services Authority and Former Chair of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation

Nout Wellink, Former President of the Netherlands Central Bank and Former Chair of the Basel Committee on Banking Supervision

* Affiliations are for identification purposes only. Council members participate as individuals and this letter reflects their own views and not those of the organizations with which they are affiliated.