WASHINGTON, D.C.—On September 19, 2017, the Systemic Risk Council submitted a comment letter to the United States Department of Treasury (UST) on its Report of June 2017 on possible reforms to banking-system regulation.
The Council believes that “the UST Report includes a number of worthwhile technical reforms and addresses important issues that are largely incidental to stability, but [is] concerned that some of the Report’s main recommendations would jeopardize the resilience of the financial system, the public finances and the welfare of citizens.”
The Council assessed the UST’s proposals against what it believes are five core pillars of the post-crisis reforms to make the financial system resilient (see Notes for Editors). Its main points are:
- Financial Stability Oversight Council (FSOC) Powers. The Council supports the UST’s desire to make the rule-making process more efficient when multiple regulatory agencies are involved. To that end, the Council recommends 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). Contrary to the UST Report, the FDIC 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.
- Off-Ramp for Large and Complex Banking Institutions. The Council 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.
- Supplementary Leverage Ratio (SLR). The Council worries that the UST Report 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. The Council shares the UST desire to avoid making stress testing overly complicated, but it 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). The Council is 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.
The full text of the letter is available here: Systemic Risk Council Letter to Treasury Department.