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Statement by the Systemic Risk Council on Money Market Fund Reform

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

Washington , D.C. – 07/19/2012 – 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:

“The Systemic Risk Council today calls 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 support proposals recommended by SEC Chairman Mary Schapiro below.  In the event the SEC fails to act promptly on these measures, we believe that the Financial Stability Oversight Council (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.

Two options have been presented by Chairman Schapiro. The first is to replace the current Stable NAV model with a Floating NAV model. As recognized in the recent SEC study and President’s Working Group Report (Report), the existence of a stable NAV has been a source of investors’ attraction to money market funds for decades. While investors and savers view MMFs as equivalent to the safety of bank savings accounts, this stable value conceals the fact that significant investment and liquidity risk potentially exists in these instruments.  The second option is to impose Capital Buffer and Holdback Requirements. The capital buffer of between .5% and 1% of fund assets would be available in times of stress and volatility to protect against market and interest rate fluctuations. This would be combined with establishing reasonable holdback requirements where the MMF sponsor could retain a certain percentage of any redemption requests—in times of market stress and liquidity challenges—where capital buffers may be insufficient to meet liquidity demands.

As noted in the working group Report, the Systemic Risk Council recognizes that these reforms represent a fundamental change in the MMF business model and thus it would be appropriate to provide for an adequate transition time for the industry to make the appropriate adjustments. We would also note that some fund sponsors have already started making a transition to a floating NAV.

We applaud Chairman Schapiro for her leadership, and urge the Commission to approve her proposals for public comment. However, if the SEC fails to move forward, we believe the FSOC should use the full range of authorities given it under Dodd-Frank to effectuate these reforms.  These authorities include recommending and directing the SEC to move forward with them.”

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.

New Group Aims to Break Dodd-Frank Logjam

Publication: Marketplace Radio

Author: John Dimsdale

07/03/2012 —John Dimsdale: They call themselves the Systemic Risk Council, led by the former Federal Deposit Insurance Corporation chair Sheila Bair. The council wants to put teeth in the Dodd-Frank reforms passed in 2010. Bair is especially worried about congressional efforts to de-fund the cops on the regulatory beat.

Sheila Bair: We will be making public statements and trying to bring public attention to this and some counterweight to, no doubt, there was a lot of industry lobbying behind that move. And that’s really unfortunate and very short-sighted, I might say, on the industry’s part.

Former senators Bill Bradley and Alan Simpson are on the council, as is former Treasury Secretary Paul O’Neill. Former Federal Reserve Chairman Paul Volcker is an advisor.

Columbia Law School’s Ira Millstein is the group’s legal counsel.

Ira Millstein: We have no axe to grind. We simply want to point out we’re frustrated and it isn’t happening and something’s got to be done about it.

Read and listen to the full interview, New Group Aims to Break Dodd-Frank Logjam, on the Marketplace Radio website.

Systemic Risk Council: A Call To Action

The Systemic Risk Council (SRC or Council) is a private sector, non-partisan body of former government officials and financial and legal experts committed to addressing regulatory and structural issues relating to systemic risk in the United States. It has been formed to provide a strong, independent voice for reforms that are necessary to protect the public from financial instability. Our goal is a system in which we can all have confidence.

Our overriding concern stems from the lack of progress made by the members of the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) to address several critical issues as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted in 2010. That concern increases each day that the implementation of systemic risk reform languishes. A sense of complacency has made reforms for effective oversight seem less urgent despite escalating problems elsewhere in the global financial system. In many ways, the financial system faces larger potential challenges today than it did in the run-up to the 2008 crisis, given the troubled state of the European Union and uncertainties at home related to fiscal and monetary policy.

It is essential that the FSOC show leadership in coordinating the rule-writing process to promote the development of cohesive, consistent regulations and provide clear and transparent explanations of the reforms in a way that is understandable to the general public. We have created this Council to assist in that effort.

 

Systemic Risk Council: A Call To Action

 

We Need a Watchdog for all the New Watchdogs

Publication: Bloomberg View

Author: Simon Johnson

06/06/2012 —Two years after passage of the Dodd- Frank financial reform law, how are we doing putting in place crucial provisions, including a way to control systemic risk?

Not well, according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. during the 2008-2009 economic disaster and author of some of the reforms in the act.

Bair is still at it. On June 6 she established a private- sector systemic-risk council, an initiative funded by the Pew Charitable Trusts and the Chartered Financial Analysts Institute. (I’m a member of the council, but I am writing here in my personal capacity; we have agreed that only Bair will speak for the council.)

Her point is simple. The Dodd-Frank Act created the all- important Financial Stability Oversight Council (known as FSOC and pronounced F-Sock). It replaced the President’s Working Group on Financial Markets, a panel frequently mentioned in former Treasury Secretary Henry Paulson’s memoir of the financial crisis, “On the Brink.” That working group lacked authority to coordinate the alphabet soup of regulators overseeing the U.S. financial system.

Read the full article, We Need a Watchdog for all the New Watchdogs, on the Bloomberg View website.

Sheila Bair on new watchdog group, Systemic Risk Council

Publication: Marketplace Radio

Author: Kai Ryssdal

06/06/2012 —Kai Ryssdal: It’s been said before, and it bears saying again: The biggest banks on Wall Street — the ones that helped bring us the economy of the past four years, the ones that were too big to fail — are even bigger now. JPMorgan Chase, Bank of America, those guys.

While she was the chairwoman of the FDIC, Sheila Bair tried hard — and succeeded to some degree — in getting regulators to follow up on what she regards as a key weakness in the American financial industry: Systemic risk. That one failure that’s gonna bring everything else down with it. Ms. Bair is now out of government and but still worried about systemic risk. She’s starting up a new watchdog group called the Systemic Risk Council to apply a little public pressure.

Sheila Bair, good to have you with us.

Sheila Bair: Thank you.

Ryssdal: Without putting words in your mouth, I wonder if we could define systemic risk as banking arrogance — and I know that’s a loaded term.

Bair: Oh, well, I think certainly there is probably a lot of hubris leading up to the crisis with both bank managers and, frankly, some regulators as well. I think banks — and it’s not just banks, I want to say financial institutions, because a lot of this was going on in what we call the shadow sector. It largely wasn’t being done by the traditional banks that take deposits and make loans — it was being done by investment banks and insurance companies like AIG and others. So I do think that that needs to be clarified. But if the risk-taking is such that whenever the losses occur, it’s going to hurt innocent bystanders among the general public, and that’s when a problem is systemic and action needs to be taken.

Read and listen to the full interview, Sheila Bair on new watchdog group, Systemic Risk Council, on the Marketplace website.

Sheila Bair to lead private financial risk council

Publication: Reuters

Author: Karey Wutkowski

06/06/2012 —Sheila Bair, who helped steer the U.S. financial system through the recent credit crisis, is forming a new private-sector group called the Systemic Risk Council to try to accelerate reforms.

A former chairman of the Federal Deposit Insurance Corp, Bair will team up with former U.S. Federal Reserve Chairman Paul Volcker, former Commodity Futures Trading Commission Chairman Brooksley Born and other experts to advise current regulators about risks to financial markets.

“As evidenced by the 2008 crisis and even recent headlines, we need a more effective and efficient early-warning system to detect issues that jeopardize the functioning of U.S. financial markets before they disrupt credit flows to the real economy,” Bair said in a statement.

Bair left her FDIC post last year and now is a senior advisor to the Pew Charitable Trusts, which is helping to form the Systemic Risk Council.

Read the full article, Sheila Bair to lead private financial risk council, on the Reuters website.

Former FDIC Chair to Lead Systemic Risk Council, Monitor Financial Regulation

Contact: Jeremy Ratner, jratner@pewtrusts.org, (202)540-6507; J.D. McCartney, jd.mccartney@cfainstitute.org, (212)418-6889 

Washington , D.C. – 06/06/2012 – The Systemic Risk Council, a private sector, volunteer group led by former Federal Deposit Insurance Corp. chair Sheila Bair, will convene this month to monitor and encourage regulatory reform of U.S. capital markets focused on systemic risk. The independent, non-partisan council was formed by CFA Institute, the global association of investment professionals that sets the standard for professional excellence and The Pew Charitable Trusts, an independent nonprofit organization that brings a rigorous, analytical approach to solving today’s most challenging problems. The Systemic Risk Council is comprised of a diverse group of experts in investments, capital markets and securities regulation, including senior advisor Paul Volcker, former Chair of the Federal Reserve.

According to Bair, concerns over the slow progress of regulators and standard-setters prompted the creation of the Systemic Risk Council. The council will monitor and evaluate the activities of those with the Congressional mandate to develop and implement Dodd-Frank provisions related to systemic risk, including the Financial Stability Oversight Council (FSOC) and the Office of Financial Research.

“The great challenge is to devise a system to identify risks that threaten market stability before they become a danger to the general public,” said Sheila Bair, senior advisor to The Pew Charitable Trusts and chair of the Systemic Risk Council. “As evidenced by the 2008 crisis and even recent headlines, we need a more effective and efficient early-warning system to detect issues that jeopardize the functioning of U.S. financial markets before they disrupt credit flows to the real economy. And two of the most critical tasks are how to impose greater market discipline on excess risk taking and effectively end the doctrine too-big-too-fail.”

The Systemic Risk Council expects to evaluate and provide commentary on the existing efforts of regulators to design and implement a credible and globally-coordinated systemic risk oversight function.  Council activities will include reports and commentary to the FSOC and its member regulators as they adopt regulations to prevent the type of severe financial disruptions which occurred in 2008 when global financial markets began to unravel.

“Despite the magnitude of the financial crisis, prospects for major reform of regulatory systems are inadequate and vague,” said John Rogers, CFA, president and CEO of CFA Institute and Systemic Risk Council member. “This council will serve as an essential sounding board for systemic risk reforms focused on strong investor protection, and offer a critical voice to promote the enforcement of regulations, financial disclosure and transparency.”

“This new council is composed of experts with a thorough understanding of the issues, and we are pleased to support their efforts to find nonpartisan and independent recommendations,” said Rebecca W. Rimel, president and CEO of The Pew Charitable Trusts. “The reforms to our nation’s financial system enacted by Congress and signed by the president in 2010 were an important first step. The task now is to implement these reforms, especially those related to systemic risk.”

The council plans to issue a call to action on June 18, at The Pew Charitable Trusts in Washington, D.C., detailing the objectives and future plans for the Systemic Risk Council.

Members of the System Risk Council are:

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, Legal Counsel to SRC; 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 S. Reed, Former Chairman and CEO of Citicorp and Citibank

John Rogers, CFA, President and CEO, CFA Institute

Alan Simpson, Former U.S. Senator (R-WY)

About CFA Institute
CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 110,000 members in 139 countries and territories, including 101,000 Chartered Financial Analyst charterholders. For more information, visit www.cfainstitute.org.

About The Pew Charitable Trusts
The Pew Charitable Trusts, an independent nonprofit, is the sole beneficiary of seven individual charitable funds established between 1948 and 1979 by two sons and two daughters of Sun Oil Company founder Joseph N. Pew and his wife, Mary Anderson Pew. The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public, and stimulate civic life. For more information, visit www.pewtrusts.org.

Group Forms to Urge Strict Oversight of Wall Street

Publication: New York Times

Author: Floyd Norris

06/05/2012 — Efforts to increase and improve regulation of Wall Street have bogged down, according to Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation. On Wednesday, she will announce a new group, the Systemic Risk Council, that will monitor and encourage regulatory reform.

“The great challenge is to devise a system to identify risks that threaten market stability before they become a danger to the general public,” she said. “We need a more effective and efficient early-warning system to detect issues that jeopardize the functioning of U.S. financial markets before they disrupt credit flows to the real economy. And two of the most critical tasks are how to impose greater market discipline on excess risk-taking and effectively end the doctrine ‘too big to fail.’ ”

The Dodd-Frank act passed in 2010 provided for numerous steps, including the creation of an Office of Financial Research that was supposed to help the newly created Financial Stability Oversight Council in identifying threats to financial stability and deciding which financial firms were systemically important and how much additional regulation they should receive. That council is composed of all the major regulatory bodies, and so far it has accomplished little.

Some of what Dodd-Frank called for has been enacted, including so-called living wills for large banks and rules on how the business of such a firm would be wound down if it failed.

Read the full article, Group Forms to Urge Strict Oversight of Wall Street, on the New York Times website.