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Statement by the Systemic Risk Council on Bank Capital Requirements

Contact: Jeremy Ratner, jratner@pewtrusts.org, (202)540-6507

Washington , D.C. – 12/07/2012 – Sheila Bair, former chair of the FDIC and current chair of the Systemic Risk Council (SRC) issued the following statement on the Council’s behalf in advance of today’s Senate Banking Committee Hearing “Oversight of Basel III”:

“While we commend the financial agencies for seeking public comment on important rules that raise the overall level of capital required for large, complex financial institutions, we have strong concerns about regulators’ continued willingness to allow these giant institutions to use their own internal risk models to lower their minimum required regulatory capital. Not only do models routinely fail in a crisis (precisely when we need loss absorbing shareholder equity most) – their use for regulatory capital purposes can create perverse incentives for risk management and real competitive advantages for larger firms relative to smaller firms doing the same activity.”

“Minimum risk-based capital requirements should be just that: a minimum. If internal models identify additional risks that require higher capital, firms should be required to raise more equity. Management, boards, examiners, investors and counterparties deserve an objective and clear minimum risk-based capital baseline.”

“To get the necessary capital in place quickly, the SRC has encouraged the regulators to prioritize implementing Basel III for the large, internationally active banks, while at the same time strengthening the Basel III leverage ratio by raising it to 8 percent.”

“It is important for the US to exercise global leadership. Strong capital requirements are a competitive strength, not weakness, and essential to system stability.”

The Systemic Risk Council

Chair: Sheila Bair, The Pew Charitable Trusts, Former FDIC Chair

Senior Advisor: Paul Volcker, Former Federal Reserve Chair

Members
Brooksley Born, Former U.S. Commodity Futures Trading Commission Chair
Bill Bradley, Former U.S. Senator (D-NJ)
William Donaldson, Former U.S. SEC Chair
Harvey Goldschmid, Columbia Law School, Former U.S. SEC Commissioner
Jeremy Grantham, Co-founder & Chief Investment Strategist, Grantham Mayo Van Otterloo (GMO)
Chuck Hagel, Distinguished Professor, Georgetown University, Former U.S. Senator (R-NE)
Richard Herring, The Wharton School, University of Pennsylvania
Simon Johnson, Massachusetts Institute of Technology Sloan School of Management
Hugh F. Johnston, Exec. VP & CFO, PepsiCo
Ira Millstein, Chair, Columbia Law School, Center for Global Markets and Corporate Ownership
Maureen O’Hara, Cornell University Johnson School of Management
Paul O’Neill, CEO, Alcoa, Former U.S. Treasury Secretary
John Rogers, CFA, President and CEO, CFA Institute
Alan Simpson, Former U.S. Senator (R-Wy)
Chester Spatt, Tepper School of Business, Carnegie Mellon University, former U.S. SEC Chief Economist

—-

The independent, non-partisan Systemic Risk Council was formed by CFA Institute and the Pew Charitable Trusts to monitor and encourage regulatory reform of U.S. capital markets focused on systemic risk.  The statements, documents and recommendations of the private sector, volunteer Council do not necessarily represent the views of the supporting organizations.

The Council works collaboratively to seek agreement on all recommendations.  This report fairly reflects the consensus views of the Council, but does not bind individual members.

Affiliations are for identification purposes only.  SRC members participated as individuals; the statement reflects their own views and not those of organizations with which they are affiliated.

Money Fund Reform Has Top Support

Publication: New York Times

Author: Edward Wyatt

11/13/2012 – WASHINGTON — A council of top financial regulators, upset with the Securities and Exchange Commission for failing to strengthen rules governing money market mutual funds since the financial crisis, is trying to force the S.E.C. to adopt stricter regulations.

The Financial Stability Oversight Council, a group of 10 regulators that includes the S.E.C. chairwoman, voted Tuesday to offer three distinct alternatives and said it would recommend one or a combination of those to the S.E.C. for adoption.

The options, which mirror recent changes that failed to gain enough support to pass the five-member commission, include having money funds establish a floating net asset value, replacing the steady $1-a-share price that funds use now, or forcing the funds to set aside more cash to absorb possible losses in the value of its holdings.

Read the full article, Money Fund Reform Has Top Support, on the New York Times website.

Former regulator Bair pours cold water on fund industry plan

Publication: Reuters

Author: Ross Kerber

11/01/2012– Former financial regulator Sheila Bair voiced worries about a new industry compromise plan for money market mutual funds, including implementing a fee for withdrawals during times of stress, saying it could worsen a crisis.

Fund companies met with regulators last week in Washington, hoping they would accept limited new rules for stabilizing the funds if necessary. But Bair dismissed such notions in a statement e-mailed by a spokesman.

“While I commend responsible members of the industry for trying to find solutions, I am concerned that gates coming down or fees going up in the middle of a crisis could make matters worse,” Bair said in the statement on Thursday.

“Another layer of complexity is not going to calm an already very risk-averse market,” wrote Bair, who chairs the Systemic Risk Council, a non-partisan group of former regulators, investors and academics backed by the Pew Charitable Trusts and the CFA Institute, set up to monitor new financial rules and reforms.

Read the full article, Former regulator pours cold water on fund industry plan, on the Reuters website.

It’s Time to Fix Money Market Funds: Simon Johnson

Publication: Yahoo! Finance

Author: Simon Johnson

10/24/2012 —Prior to September 2008, few officials focused on “systemic risk” — the idea that a single firm or a particular asset class could create a vulnerability that would bring down the financial system and do great damage to the real economy. Then Lehman Brothers failed and the repercussions threatened to shut down the global financial system.

The Dodd-Frank financial reform legislation of 2010 created a new Financial Stability Oversight Council (FSOC), charged with helping to identify and coordinate regulatory efforts to address systemic risk. Now the FSOC faces its first serious challenge — ironically, on an issue that was central to the crisis events of fall 2008: money market mutual funds.

Money market funds were originally created, in the high inflation environment of the 1970s, as a way for investors to earn higher returns than they could on bank deposits. And many investors see their money market accounts as essentially the same as their bank accounts — they appear to have a stable principal value, interest accrues, and you can write checks.

Read the full article, It’s Time to Fix Money Market Funds: Simon Johnson, on the Yahoo! Finance website.

US regulators urged to outdo Basel III rules

Publication: Financial Times

Author: Shahien Nasiripour and Tom Braithwaite

11/13/2012– A group of former senior US financial regulators has urged authorities to drastically cap big banks’ borrowings, adding to a growing chorus of sceptics who are challenging the international response to the financial crisis.

In a letter on Thursday, the Systemic Risk Council recommended to US bank regulators that they consider tightening the so-called leverage ratio that limits banks’ ability to fund themselves with debt and other forms of borrowing. Banks with large derivatives operations would be subject to even tougher requirements under the proposal.

Read the full article, US regulators urged to outdo Basel III rules, on the Financial Times website.

Systemic Risk Council Letter on Regulatory Capital Rules

Systemic Risk Council

October 4, 2012

Dear Chairman Bernanke, Comptroller Curry, and Acting Chairman Gruenberg:

The Systemic Risk Council, an independent and non-partisan council formed by the CFA Institute and The Pew Charitable Trusts, appreciates the opportunity to comment on the three notices of proposed rulemaking cited above. We have been concerned about the slow progress of regulatory reform of U.S. capital markets, especially those focused on systemic risk, and are therefore pleased to see these proposals. Your rulemaking actions this June begin to address one of our key priorities: immediate action to propose and finalize rules that will substantially strengthen both the quality and amount of capital at the nation’s largest financial institutions.

We strongly support your proposals overall to implement the new Basel III regulatory capital framework, the Standardized Approach for risk-weighted assets contained in Basel II, and the capital-related provisions in the Dodd-Frank Act that will raise both the quality and quantity of capital at banking organizations in the United States. These are good minimum standards that can and should be exceeded, based on the risk profile of an individual banking organization, as determined by that organization’s primary federal regulator. Your actions are in stark contrast to your European counterparts who reportedly want the Basel III capital requirements to be the maximum rather than the minimum. The recent European-British finance ministers’ debate on requiring more than the Basel III minimum capital is just one example. Continental Europeans felt that stronger capital requirements would confer a competitive advantage on UK banking organizations. We believe that a stronger U.S. regulatory capital regime will continue to benefit U.S. banking organizations vis-a-vis their more thinly capitalized European competitors.

Systemic Risk Council Comment Letter on Regulatory Capital Rules

 

Statement by the Systemic Risk Council (SRC) on Money Market Fund Reform

Contact: Jeremy Ratner, jratner@pewtrusts.org, (202)540-6507

Washington , D.C. – 09/13/2012 – Sheila Bair, former chair of the FDIC and current chair of the Systemic Risk Council (SRC) issued the following statement on the Council’s behalf:

“We were deeply disappointed to learn that three SEC Commissioners have refused to publish for public comment a proposed rule to reduce the systemic risk posed by money market funds. Given the size and scope of this risk we believe the Financial Stability Oversight Council (FSOC) – and its members – should use their individual and collective authorities to address this risk before another potentially destabilizing run.”

On July 19, 2012 the Systemic Risk Council called for prompt and decisive action to curb systemic risks posed by money market mutual funds. When the Reserve Primary Fund “broke the buck” in 2008, extraordinary actions were required of governments worldwide to back-stop and calm investors in the money market fund (MMF) industry. The risk that emergency government support may again be needed to stem large outflows from money market funds remains a serious challenge for U.S. and other markets. The Council believes such circumstances have been allowed to linger for too long and strongly supports proposals recommended by SEC Chairman Mary Schapiro.

At that time, the Council also noted that “In the event the SEC fails to act promptly on these measures, we believe that the FSOC should use its powers under the Dodd-Frank law to move forward with reforms to protect taxpayers against the risk of a need for bailouts in the future.”

“We applaud Chairman Schapiro for her leadership on this important issue, and we regret the unwillingness of a majority of the Commission to seek public comment on this vital reform. Given the current impasse at the SEC, we believe the FSOC should use the full range of authorities given it under Dodd-Frank to effectuate needed reforms. These authorities include using Section 120 to formally recommend that the SEC move forward on Chairman Schapiro’s recommendations, and using Title 8 to designate certain money market mutual fund “activities” as “systemically important” – and requiring that the SEC impose heightened risk management standards as the FSOC determines necessary to address the risk. Clearly the SEC is best positioned to address this issue most efficiently, but, if the Commission continues to be unwilling to take the necessary action, FSOC must step in.”

The Systemic Risk Council

Chair: Sheila Bair, The Pew Charitable Trusts, Former FDIC Chair

Senior Advisor: Paul Volcker, Former Federal Reserve Chair

Members
Brooksley Born, Former U.S. Commodity Futures Trading Commission Chair
Bill Bradley, Former U.S. Senator (D-NJ)
William Donaldson, Former U.S. SEC Chair
Harvey Goldschmid, Columbia Law School, Former U.S. SEC Commissioner
Jeremy Grantham, Co-founder & Chief Investment Strategist, Grantham Mayo Van Otterloo (GMO)
Chuck Hagel, Distinguished Professor, Georgetown University, Former U.S. Senator (R-NE)
Richard Herring, The Wharton School, University of Pennsylvania
Simon Johnson, Massachusetts Institute of Technology Sloan School of Management
Hugh F. Johnston, Exec. VP & CFO, PepsiCo
Ira Millstein, Chair, Columbia Law School, Center for Global Markets and Corporate Ownership
Maureen O’Hara, Cornell University Johnson School of Management
Paul O’Neill, CEO, Alcoa, Former U.S. Treasury Secretary
John Rogers, CFA, President and CEO, CFA Institute
Alan Simpson, Former U.S. Senator (R-Wy)
Chester Spatt, Tepper School of Business, Carnegie Mellon University, former U.S. SEC Chief Economist

The independent, non-partisan Systemic Risk Council was formed by the CFA Institute and the Pew Charitable Trusts to monitor and encourage regulatory reform of U.S. capital markets focused on systemic risk. The statements, documents and recommendations of the private sector, volunteer Council do not necessarily represent the views of the supporting organizations.

The Council works collaboratively to seek agreement on all recommendations. This report fairly reflects the consensus views of the Council, but does not bind individual members.

Affiliations are for identification purposes only. SRC members participated as individuals; the statement reflects their own views and not those of organizations with which they are affiliated.”

In Effort to Curb Money Market Funds, a Plan B Is Considered

Publication: New York Times

Author: Peter Eavis and Nathaniel Popper

08/23/2012 —After the failure of one effort to overhaul a major part of the mutual fund industry, top government officials worked on Thursday to find alternative ways to rein in what they see as a systemic threat to the financial system.

Treasury Secretary Timothy F. Geithner and other top regulators were given sweeping powers after the 2008 financial crisis that would allow them to force new rules on money market funds, a popular type of mutual fund that has taken some of the blame for the crisis. On Wednesday evening, the head of the Securities and Exchange Commission, Mary L. Schapiro, announced unexpectedly that she was calling off her agency’s long-running effort to change rules for money funds.

Mr. Geithner and fellow regulators had urged the S.E.C. to act and could now use their new authority to shift oversight of the money market fund industry away from the S.E.C., a move that has few precedents. But after being surprised by the suddenness of the S.E.C.’s decision, numerous agencies were huddling to discuss whether they could carry out such bold moves or would have to rely on more modest alternatives, people with knowledge of the deliberations said.

Read the full article, In Effort to Curb Money Market Funds, A Plan B Is Considered, on the New York Times website.

Sheila Bair: Two Years After Dodd-Frank, Why Isn’t Anything Fixed?

Publication: Yahoo! Finance

Author: Sheila Bair

07/20/2012 —The late Gilda Radner played an endearing character named Roseanne Roseannadanna on Saturday Night Live in the 1970s.

The character would provide hilarious commentary on current events (usually accompanied by gross out observations on bodily functions) then conclude by saying “It’s always something — if it ain’t one thing, it’s another.”

As we are inundated with a continuing procession of financial scandals — MF Global’s bankruptcy, JP Morgan Chase’s “London Whale” and his trading losses, Barclays’ rate fixing, Peregrine Financial’s fraud — Roseanne’s “it’s always something” seems an apt description of the financial system today.

The Dodd-Frank Wall Street Reform Act, the landmark law enacted on July 21, 2010, was designed to end the kind of risk taking, greed, and avarice that brought us the financial crisis of 2008. Yet, notwithstanding thousands of pages of proposed and final rules to implement this important law, nothing much seems to have changed. The prospect of a quick buck too often trumps any notion of ethical behavior or gosh-forbid, long-term business relationships. Traders still feel they are masters of the universe, misappropriating customer funds, making outsized bets in the derivatives markets and fixing interest rates. Some of them apparently think that laws are made to be broken if they can improve their year-end bonuses. But after all, wasn’t that the lesson learned from the hand slaps they received for the subprime mess?

Read the full article, Sheila Bair: Two Years After Dodd-Frank, Why Isn’t Anything Fixed?, on the Yahoo! Finance website.

Sheila Bair urges prompt reforms for money market funds

Publication: Reuters

Author: Alexandra Alper

07/19/2012 —If the Securities and Exchange Commission does not beef up its oversight of money market funds, a council of regulators should take the reins, former U.S. bank regulator Sheila Bair said on Thursday.

Bair, who formerly chaired the Federal Deposit Insurance Corp, applauded the reforms that SEC Chairman Mary Schapiro has floated to bolster the funds, four years after a fund “broke the buck,” letting its shares tumble before a dollar a piece and rattling markets.

But Bair, in a letter to regulators, said that if Schapiro cannot get the votes needed to push the rules through, the Financial Stability Oversight Council should step in.

“The risk that emergency government support may again be needed to stem large outflows from money market funds remains a serious challenge for U.S. and other markets,” Bair wrote, as chair of the Systemic Risk Council, a private group that monitors reform.

Read the full article, Sheila Bair urges prompt reforms for money market funds, on the Reuters website.