Wednesday, November 6, 2013

Despite Reforms, Tri-Party Repo Remains a Fed Concern

New York Fed President Urges Industry to Present Solutions or Be Presented With Solutions

Author: David Schwartz J.D. CPA

In an October 14, 2013 address, William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, expressed some lingering concerns he and the Fed have about the tri-party repo market. Despite the reform efforts of both regulators and the tri-party repo industry, Mr. Dudley worries that tri-party repo still remains an area of significant systematic risk. In particular, he worries that current reforms do not address the risk that "a dealer's loss of access to tri-party repo funding could precipitate destabilizing asset fire sales, whether by the dealer itself, or by the dealer’s creditors following a default." As we learned in 2008, these fire sales can have devastating and far reaching effects.

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Monday, March 25, 2013

Is the Dodd-Frank "Cure" Worse than the Disease?

Author: David Schwartz J.D. CPA
Rather than responding appropriately to the crisis, which would include developing a modern regulatory system with the flexibility to adapt to changes in the global financial system, we instead have been saddled with an increasingly prescriptive and inflexible regulatory environment that is characterized far more by more regulation than by smart regulation.  --SEC Commissioner Daniel M. Gallagher


While the US economy still remains the most powerful economic engine globally, rather than making US financial markets stronger, could parts of comprehensive financial regulatory reform be making them weaker, or driving economic activity we once took for granted elsewhere?  Important voices both in the the public and private sector have been raising the alarm about the potential that aspects of Dodd-Frank may be putting US financial health in peril rather than protecting it.  SEC Commissioner Daniel M. Gallagher is one such voice.  In a series of speeches before a variety of audiences, Commissioner Gallagher has questioned the effectiveness of Dodd-Frank in protecting us from another financial crisis, criticized the process by which Dodd-Frank was formulated, and worried openly about the quality and quantity of regulation required by the legislation.

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Monday, December 31, 2012

Basel Provides More Clarity on Capital and Liquidity Frameworks, CCP Exposures

Author: David Schwartz J.D. CPA

In response to interpretive questions received from banking officials, finance ministers, regulators, bankers and other industry players, the Bank for International Settlements (BIS) has issued further clarifications to their regulatory frameworks for capital and liquidity as well as the interim framework for determining capital requirements for bank exposures to central counterparties. The December 2012 publication lays out the fourth set of frequently asked questions (FAQs) that relate to Basel III counterparty credit risk requirements, including the default counterparty credit risk charge, the credit valuation adjustment capital charge, and asset value correlations. It also includes FAQs relating to the interim framework for bank exposures to CCPs. This latest FAQ builds on the most previos FAQ issued in November 2012, and BIS has helpfully highlighted in yellow changes, additions, and edits from the November guidance.

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Sunday, November 4, 2012

Fed Governor Calls Dodd-Frank Flawed. Suggests Limits on Bank Size.

Author: David Schwartz J.D. CPA

In his October 10, 2012 remarks at the University of Pennsylvania Law School, Federal Reserve Board Governor, Daniel K Tarullo, criticized Dodd-Frank sharply for missing the mark in a number of vital ways in its framework for ensuring financial stability.  Tarullo called Dodd-Frank a sweeping piece of legislation pieced together in a crisis, based on some theories of financial stability that are in many respects undeveloped or uncontested, and incomplete in a number of systematically important risk areas.   According to Tarullo, this lack of an overarching unifying concept of financial stability or an officially embraced consensus theory of how financial stability is undermined presents a major weakness in the reform effort and is a significant hurdle for regulators in implementing and enforcing the legislation.  This poor theoretical foundation for financial stability leaves major gaps in the handling of the moral hazard associated with too-big-to-fail institutions, as well as other areas like shadow banking.  Consequently, Tarullo believes that these gaps in Dodd-Frank leave room for further Congressional action, including imposing caps on the size of banks.

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Tuesday, October 2, 2012

Beyond Basel. Can We Do Better than Basel III?

Author: David Schwartz J.D. CPA
Basel III introduces a leverage ratio and raises the minimum risk-weighted capital ratios, but it does so using highly arcane formulas, suggesting more insight and accuracy than can possibly be achieved. Where the markets assess, demand and adjust intrinsic risk weights on a daily basis, regulators using Basel look backwards and never catch up.

Even as countries strive to meet the quickly approaching Basel III deadlines, some fairly influential voices in regulatory policy are wondering aloud if the latest Basel guidelines are up to the task.   Thomas M. Hoenig, director of the Federal Deposit Insurance Corporation, in a September 14, 2012 address before the American Banker Regulatory Symposium, raised his concerns that Basel III is based on faulty assumptions and processes, and introduces unworkable complications into an already complex system.  Hoenig proposes an alternative, a "back to basics" approach he feels would be more easily monitored and enforced, and represent a better measure of a firm's ability to withstand financial adversity.

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