Regulatory Reform Summit 2011
July 13, 2011
- Highlights - Regulatory Reform Summit: Dodd-Frank Impact Analysis
Systemic Risk Regulation and Capital Requirements Perspectives
This expert panel confirmed that the financial industry believes capital requirements are a prudent requirement, but they cannot replace effective regulations. It is critical that capital requirements are carefully balanced so as to not restrict credit availability, but also to protect the competitiveness of U.S. financial institutions. John Dugan, former Comptroller of the Currency, expressed his belief that U.S. federal regulators will implement new capital provisions that are aligned with international standards, and recognized that U.S. banks have already made improvements to balance sheets to comply with new Basel III capital and liquidity requirements.
Earlier in the day, SIFMA’s President & CEO, Tim Ryan, noted that since the end of 2007, U.S. financial firms have raised more than $300 billion of common equity while repaying taxpayers for their TARP investment early and with a $12 billion profit. The largest U.S. banks have reduced their average leverage ratio from 16:1 to 11:1 and increased loan loss reserves by about 200%. Off-balance sheet activity has also been reduced dramatically. Requiring too much capital will tie the hands of financial institutions in capital formation, lending and extending credit to businesses and families that, in turn, grows our economy and creates jobs.
On another note, panelists agreed that progress towards the goal of greater transparency among financial firms continues to be made. Steven Strongin, Global Head of Investment Research for Goldman Sachs, noted increased disclosure requirements will “help regulators better understand banks’ business activities and will allow the market to better price risk.”
The panelists also agreed that the resolution authorities under the Dodd-Frank Act will help mitigate the damaging effects of large bank failures on the broader economy. James Wigand, Director of the Office of Complex Financial Institutions at the Federal Deposit Insurance Corporation (FDIC), said living wills will help the market understand the effect of financial firms’ resolutions and will allow regulators to look at the interconnectedness of institutions. More work needs to be done with regard to cross-border resolutions. Coordination across regulators, jurisdictions and geographical borders is not happening at the level it should, decreasing the odds that completed rules will fit in with others in a cohesive, efficient manner. Wigand said there are limitations on the practical implementation of any cross-border regime which depends on increased coordination and cooperation among international regulators.
Strongin concluded with the importance of cumulatively maintaining “a competitive system that actually works both for the economy and for the investors”.
SIFMA supports the creation of a comprehensive resolution authority that can wind down any failing, systemically important financial institution in a way that preserves financial market stability. In agreement with the panel, SIFMA believes increased coordination across borders is necessary to improve the current system. By ensuring there are mechanisms for resolution authority, Dodd-Frank ended taxpayer bailouts and the notion that financial firms can be “too big to fail.”