News Column

New Reforms Released Today Will Reduce Systemic Risk and Improve Response to Threats to the U.S. Financial System

September 4, 2014



WASHINGTON, Sept. 4 -- The Bipartisan Policy Center issued the following news release:

The Bipartisan Policy Center's (BPC) Financial Regulatory Reform Initiative released a series of reforms today to improve the regulation and supervision of the U.S. financial system in a new report, Responding to Systemic Risk: Restoring the Balance (http://bipartisanpolicy.org/library/report/responding-systemic-risk-restoring-balance). The report, authored by task force members John C. Dugan, Peter R. Fisher, and Cantwell F. Muckenfuss III, includes recommendations to:

* Restore the Federal Reserve's ability to make emergency loans to individual non-depository institutions; * Eliminate the Dodd-Frank requirement for the Federal Deposit Insurance Corporation (FDIC) to gain prior congressional approval to provide emergency guarantees to debt issued by depository institutions or affiliates; * Provide access to collateralized liquidity from the Federal Reserve to broker-dealers owned by regulated systemically important financial institutions (SIFIs) and those susceptible to runs; * Reform the Financial Stability Oversight Council (FSOC) to improve regulatory accountability and transparency; and * Improve the regulation and supervision of nonbanks by properly accounting for the ways they are different from banks.

The Dodd-Frank Act helped make the U.S. financial system safer than it was before the crisis. However, certain provisions of Dodd-Frank go too far and unnecessarily restrict the ability and authority of the Federal Reserve and the FDIC to respond to crises. In addition, Dodd-Frank failed to give U.S. financial regulators and supervisors a few important tools that would help them to prevent systemic threats from arising. These recommendations are designed to address such concerns, to help prevent and combat systemic threats and to increase long-run sustainable economic growth and job creation.

BPC's Financial Regulatory Reform Initiative has spent the last two years analyzing the implementation of Dodd-Frank, while assessing its impact on financial stability, economic growth and consumer protection. This report is the latest in a series of related white papers and recommendations.

Graph omitted. Click here to view: (http://bipartisanpolicy.org/news/press-releases/2014/09/new-reforms-released-today-will-reduce-systemic-risk-and-improve)

Read the report (http://bipartisanpolicy.org/library/report/responding-systemic-risk-restoring-balance)

"During the 2008 crisis, government officials were grateful to have 'break-the-glass-in-an-emergency' authority to address unforeseen problems at individual firms," said John C. Dugan, a partner at Covington & Burling LLP. "Future government officials need to have that same emergency authority to address future unanticipated problems that threaten financial stability - but only in true emergencies and only with appropriate safeguards."

"Liquidity illusion - the belief that we all can withdraw our deposits or sell our securities at the same time - is a pervasive feature of our financial system," said Peter R. Fisher, senior fellow of the Center for Global Business and Government at the Tuck School of Business at Dartmouth. "We need a better balance between the measures to address these 'run risks' before the next crisis while ensuring that we also have the tools to stabilize the system in a crisis. These recommendations seek to move us in that direction."

"For too long, our approach to regulation in this industry has been too bank-centric," said Cantwell F. Muckenfuss III, a partner at Gibson, Dunn & Crutcher LLP. "The financial crisis demonstrated all too well that systemic risk can arise in enterprises and activities that are not banks or banking. Dodd-Frank recognizes that fact as well as the need to appropriately tailor supervision and regulation based on the institution and activity in question. One size does not fit all. Our recommendations would both enhance the ability of the FSOC to address systemic risk, as well as the ability of the Fed to meet the need to tailor its approach to supervision."

The initiative held an event today (http://bipartisanpolicy.org/events/2014/09/responding-systemic-risk-restoring-balance) to unveil this report and further a discussion on these important issues.

For more information on this project, please visit http://bipartisanpolicy.org/projects/financial-regulatory-reform-initiative.

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