An advisory group with a membership featuring a “who’s who” of top federal financial regulators spanning the past 30 years has urged the Treasury to rethink some of its recommendations issued in June to reform the federal financial institution regulatory scheme.
In particular, the Systemic Risk Council (in a comment letter) told Treasury it is concerned that some of its report’s main recommendations would “jeopardize the resilience of the financial system, the public finances and the welfare of citizens.” That includes opposing an “off-ramp” that would exempt large and complex firms from other prudential regulations if they exceed a specified leverage ratio.
In June, the Treasury released its 149-page report, “A financial system that creates economic opportunities: Banks and credit unions.” It was the first of an expected four reports from the agency in response to a Feb. 3 executive order by President Donald Trump calling for a comprehensive review of financial regulations.
The Systemic Risk Council describes itself as an independent, non-partisan group formed to monitor and encourage regulatory reform of U.S. and global capital markets, with a focus on systemic risk. The organization, it states, is funded by the CFA Institute, a global association of “more than 125,000 investment professionals.”
Among the members listed by the Council are: Former Federal Reserve Board Chairman Paul Volcker (listed as a “senior adviser”), former FDIC Board Chair Sheila Bair (chair emeritus of the group), former U.S. Sen. Bill Bradley (D-N.J.), former chair of the Commodity Futures Trading Commission Brooksley Born, Former U.S. Secretary of the Treasury Paul O’Neill, and former Vice-Chair of the Federal Reserve Board Alice Rivlin.
In its comment letter, the SRC made several specific suggestions to address its concerns, including:
- Off-Ramp for Large and Complex Banking Institutions: SRC said it 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.
- Financial Stability Oversight Council (FSOC) Powers: SRC recommended 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): SRC recommended (contrary to the Treasury report) that the deposit insurer 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, SRC advised.
- Supplementary Leverage Ratio (SLR): SRC said it “worries” that the Treasury 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: SRC indicated it shares Treasury’s desire to avoid making stress testing overly complicated, but 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): SRC expressed 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. “