Tuesday, April 4, 2017

Fed Paper Seeks Optimal Capital Ratio for U.S. Banks

Empirical cost-benefit analysis yields a range of ratios

Author: David Schwartz

A working paper published on April 3, 2017 by the US Federal Reserve attempts to quantify the costs and benefits of bank capital to arrive at an estimate of the optimal capital ratio for U.S. banks. In their paper,[1] authors Simon Firestone, Amy Lorenc, and Ben Ranish begin their analysis by estimating to what extent the probability of financial crises falls as bank capital rises and calculate the output costs of a financial crisis. Against this cost, the authors then balance the cost of equity, a more expensive source of funding for banks than debt.

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Wednesday, March 22, 2017

SIFMA Asks G-20 for More Regulatory Balance

Global policymakers should strike the right balance between growth and stability

Author: David Schwartz

In a March 15, 2017 letter, SIFMA urged Treasury Secretary Steven Mnuchin to take a leading role in the G-20 to reassess existing regulatory reforms and strike the appropriate balance between growth and stability. While acknowledging that regulatory reforms since the financial crisis have made markets more stable, SIFMA believes that too much emphasis on stability may be unnecessarily impeding growth. The letter asks the Treasury Secretary to engage the G-20 members to reexamine existing regulations and create an improved cross-border financial regulatory consultative process.  SIFMA believes that such an effort would “foster economic growth and vibrant financial markets...(and) make regulation efficient, effective and appropriately tailored.”  SIFMA said that the U.S. is in a position to lead the G20 in an endeavor like the E.U.’s 2015 “Call for Evidence”[1] and encouraged Secretary Mnuchin to do so.   

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Monday, March 6, 2017

Four Disruptive Elements Drive Regulatory Activity

“Undercurrents of Disruption to Our Markets and Societies: How We Can Respond”

Author: David Schwartz

In her keynote address at the 2017 Brodsky Family Northwestern JD-MBA Lecture Series, CFTC Commissioner Sharon Y. Bowen described her thinking on the key trends driving regulatory activity. Commissioner Bowen identified “four disruptive elements” she believes are substantially responsible for changes that have been seen recently in financial markets. In turn, these disruptive elements are prompting questions about what they mean for markets and society, and what actions we should ask from regulators.

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Sunday, February 26, 2017

The Overlooked Merits of Bank Disclosure

Author: David Schwartz
  • What if banks were to get a capital benefit from investing in superior risk management technology – and if that benefit was disclosed to the market?
  • Should not the costs of risk management investments by FDIC-insured banks be partly repaid by taxpayers in the form of capital relief?
  • Why don’t capital rules allow a reduction in risk-weighted requirements, to help offset the lost revenue and encourage conservative risk management?
  • Dynamic metrics are far more relevant for understanding the levels of stability in securities finance than are static sizing and demographics alone.

European bankers are caught up in a debate over whether to disclose their full supervisory capital demands to market participants. That’s an issue because bank supervisors, under Pillar 2 of the Basel III accord, can set a bank’s regulatory capital “guidance” at a level higher than its Pillar 1 “requirements.” Bank analysts and investors can discount the securities of banks with relatively high guidance, assuming that supervisors have learned something negative in their confidential reviews. That’s the essence of Pillar 3: Market Discipline.

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Sunday, February 12, 2017

For the Want of a Nail … the Details of Regulatory Reform


Author: David Schwartz

To look for the effect of new rules on banks, regulators rely on academic models that treat banks as aggregates. In truth, global banks are collections of service businesses, not simply larger versions of George Bailey’s 1946 community lender. Missing that fact may be one reason why the list of unintended consequences from regulatory reform is growing. Critics in the U.S., without anticipating a challenge, are calling for the repeal of the Dodd-Frank Act. But expecting repeal is a dangerous strategy for bankers.

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