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 J.D. CPA

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 J.D. CPA

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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Sunday, November 27, 2016

FSB Announces Priorities for 2017

Shadow Banking, G-SIFIs, and Asset Management are among FSB's 2017 priorities.

Author: David Schwartz J.D. CPA

At its November 17, 2016 plenary session in London, the Financial Stability Board (FSB) met to discuss current vulnerabilities and agree on priorities for 2017.  While noting that the global financial system is more resilient as a result of the regulatory reforms introduced following the 2008 financial crisis, the FSB is keeping a close eye on areas of concern like high sovereign and corporate debt, asset quality and profitability issues faced by banks, and unfinished balance sheet repair in some parts of the financial system.  With these and other potential vulnerabilities in mind, the FSB has assembled a list of the areas upon which they plan to focus their attention in the upcoming year.

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Tuesday, November 15, 2016

Sovereign Wealth Funds Could Boost Global Liquidity

Author: David Schwartz J.D. CPA

Prior to Basel III and Dodd-Frank, broker-dealers were the world’s main supply of high quality liquid assets (HQLA).  New regulations have forced broker-dealers to reduce drastically their inventories of these high quality collateral assets at a time when a flight to quality and safety has placed these assets in extremely high demand. This unintended consequence of regulatory reform has restricted supply, driven up the price of HQLA, and reduced global liquidity overall. Sovereign wealth funds, on the other hand, have been investing heavily in HQLA since the 1980s and 1990s, becoming one of the largest owners of these desirable assets, particularly G7 government bonds. The prolonged low interest rate environment has prompted many sovereign wealth funds to explore new ways to enhance yield. Among these yield enhancement methods is securities lending. Given their ample inventories of HQLA, securities lending by sovereign wealth funds has the potential to ease, if not cure, the world’s liquidity woes.  

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Thursday, November 3, 2016

Making Sense of the New Regulatory Environment

Banks operate in an almost entirely new reality than they did before the financial crisis.

Author: David Schwartz J.D. CPA

In an October 20, 2016 address before the British Bankers Association's Annual International Banking Conference, Dr. Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, highlighted the environment of uncertainty in which banks currently operate. In addition to such things as technological change and Brexit, he also spoke about the fear and loathing arising from regulatory uncertainty and hinted at some ways regulators can help to lessen the regulatory strain.

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