Tags: Senate | bank | Dodd-Frank | liquidity

Senate Banking Committee Looks at Financial Regulation — Part II

By    |   Wednesday, 17 September 2014 07:39 AM

On Sept. 9, the Senate Banking Committee, chaired by the retiring Sen. Tim Johnson, D-S.D., held a hearing on the state of financial regulation and implementation of the Dodd-Frank Act, which this writer refers to as "limplementation," titled "Wall Street Reform: Assessing and Enhancing the Financial Regulatory System."

This article will cover other issues raised at the hearing beside the questions surrounding the enforcement of the requirement that the "too big to fail" banks submit convincing "living wills" to regulators in order to demonstrate that they will no longer be too big to fail.

When Sen. Chuck Schumer, D-N.Y., a member of the Senate Leadership who is highly influential because he represents the Wall Street financial center, he attends these hearings, he usually arrives near the end. But this time he was the second Democratic questioner after Johnson, presumably by prior arrangement.

On this occasion, what was on Schumer's mind was a new liquidity rule proposed by the federal banking regulators (the Federal Reserve acted on Sept. 3) that is supposed to implement provisions of Dodd-Frank that require regulators to set standards for liquidity in order to reduce the likelihood of another round of runs similar to those that occurred in 2008. Former Treasury official Peter Fisher recently referred bluntly to the "liquidity illusion" to describe the confidence investors and banks try to maintain despite the fact that market conditions can change instantaneously and cause panics.

The new regulation is generous to banks, perhaps overly so, in that it allows banks to fall below the so-called "liquidity coverage ratio" in times of stress. The argument made by Fed Governor Dan Tarullo is that liquidity is there to be used; otherwise the rule would raise the classic argument over the impracticality of requiring, for example, that there always be a taxi at the train station. This writer would point out that the rule still begs the question as to who should bear the risk that the entire banking system could fall below standard at the same time, and the liquidity coverage will indeed prove to be illusory in a crisis.

Left open at the Fed's meeting was the question of how municipal securities should be treated for liquidity purposes. The Fed proposes to study the liquidity of municipal securities and to consider granting the most liquid municipal securities equal status with corporate bonds at some time in the future. Local officials have protested this decision and smartly contacted Schumer, who told the committee they were "howling" about municipal securities being accorded inferior treatment not only compared with corporate bonds but also foreign sovereign debt. Schumer complained that this would increase the cost of funding needed infrastructure projects, and he called on all three banking regulators to reconsider. Tarullo assured Schumer that the Fed staff is working on language to resolve this problem.

Sen. Robert Menendez, D-N.J., challenged Securities and Exchange Commission (SEC) Chair Mary Jo White by announcing that more than a million commenters have registered their support for a requirement that corporations disclose to their shareholders how much they are spending on political contributions.

White responded as she has done in other settings that the Commission is focusing on rules required to implement Dodd-Frank and the Jumpstart Our Business Startup Act, but it was one of several awkward moments for White.

Another occurred when Sen. Sherrod Brown, D-Ohio, who is in line to become chairman of the committee after this election or the next, complained that the SEC has not updated disclosure rules for bank holding companies since 1986.

Later Sen. Elizabeth Warren, D-Mass., had Tarullo dancing when she asked him to explain why the Fed has not referred a single senior bank executive whose bank has been fined to settle a long list of charges with federal regulators, whereas the savings and loan crisis yielded more than a thousand referrals and more than 800 convictions. Rather, JPMorgan CEOs Jamie Dimon got an $8.5 million bonus.

Overall the hearing rates at least 3 gavels as political theater.

(Archived video and witness statements can be found here.)

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On Sept. 9, the Senate Banking Committee held a hearing on the state of financial regulation and implementation of the Dodd-Frank Act, which this writer refers to as "limplementation," titled "Wall Street Reform: Assessing and Enhancing the Financial Regulatory System."
Senate, bank, Dodd-Frank, liquidity
Wednesday, 17 September 2014 07:39 AM
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