Wednesday, December 28, 2016

Is Blockchain the Future of Securities Lending?

Author: David Schwartz

By now, all but the most strident luddite has heard of Bitcoin, the notorious stateless crypto-currency. Naturally, financial firms and regulators have started to take notice of Bitcoin. But it is not necessarily the currency they are interested in. Rather, they are exploring the technology that makes the virtual currency possible. Computer-driven concepts borrowed from Bitcoin like the blockchain, distributed ledgers, and self executing contracts are starting to become the new frontier in areas like securities lending and repo.  

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Friday, December 23, 2016

Industry Leaders Want Dodd-Frank Fixed Not Scrapped

Time to Deal with the Devils in the Details

Author: David Schwartz

As we mentioned last week it is premature to write the obituary for Dodd-Frank. Regulators have publicly recommitted themselves to seeing Dodd-Frank implemented fully. But regulators are not the only ones who would like to hold on to at least some aspects of the new regulatory landscape. Recently in speeches and congressional testimony, rather than calling for wholesale repeal, leaders of several of the largest banks and trade groups in the U.S. financial industry have advocated revision and refinement of the regulations under the Act, preserving what works while changing what does not.

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Friday, December 16, 2016

Dodd-Frank Won't Go Gently into that Good Night

Regulators are dedicated to the unfinished work of Dodd-Frank

Author: David Schwartz

Listening to the pundits, the press, and the political class, one gets the impression that the repeal of the Dodd-Frank Act and its new regulatory landscape is imminent and certain.  But to paraphrase Mark Twain, the rumors of Dodd-Frank’s death have been greatly exaggerated. Lately, regulators at the Fed, CFTC, and OCC have been giving full-throated rhetorical support to the post-crisis financial reforms already in place, and have both tacitly and explicitly been signaling their commitment to completing what they believe is the unfinished work of the new financial regulatory regime.  While the electoral triumph of those long opposed to Dodd-Frank almost certainly will introduce a strong deregulatory assault against the legislation, it does not necessarily mean the death of every aspect of Dodd-Frank Act. 

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Monday, December 5, 2016

Basel Chair Calls for More Research into Bank Risk Models

Author: David Schwartz

In his December 2, 2016 keynote speech at the second Conference on Banking Development, Stability and Sustainability, Basel Committee Chairman Stefan Ingves invited the financial industry and academics to help better calibrate capital and liquidity standards. As the Committee finalizes Basel III, Ingves said that he welcomes research and rigorous analysis of how the Committee should think about the capital benefits of allowing banks to use internally modeled approaches to calibrate appropriate capital floors. While standardized modeling approaches have the benefit of being uniform and simple, they lack precision and may ignore real differences in risk among banks better addressed by internal models. Recognizing that “academic challenge…is an essential ingredient of a healthy financial and regulatory system,” Chairman Ingves says that the Basel Committee is eager to see research that answers questions like:


  • What are the pre-conditions for such models to produce better outcomes than, say, simpler standardized approaches? 
  • To whom do the benefits of improved modeling accrue?  For example, if a bank using a model can lower its capital requirements by, say, 30%, what are the financial stability and real economy benefits of such an approach? 
  • To what extent do the benefits of modeling accrue to lower-risk borrowers as opposed to the parties being compensated for developing and using the models?
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Wednesday, November 30, 2016

Enlightened, not Reactive Regulation: Now It Starts

Author: David Schwartz

Since passage of the Dodd-Frank Act in 2010, the financial industry has been dealing with an almost unstoppable wave of regulatory reforms. Most, if not all have been designed to prevent a repetition of the problems that followed the failure of AIG and Lehman Brothers in 2008. Now, after the U.S. election of a conservative majority in two (and soon to be all three) branches of the U.S. federal government, many bankers feel that a huge regulatory weight is about to be lifted. Some bankers expect a reversal of the drive toward reforms, perhaps even repeal of Dodd-Frank. That’s not going to happen, at least not without a lot of work.

Although there may be receptive listeners in government, it will take more than a supportive administration to ease the pressure for reforms. The nation has been repeatedly told that the financial industry brought the economy to the brink. Reform is now expected by Main Street voters. A new narrative must be formulated before the conservatives can delay imposition of the final rules, much less repeal the most restrictive measures.

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