Banking Law Prof Blog

CFPA in the Dodd Version of Financial Reform

A New York Times analysis of the regulatory reform measure introduced by Senator Chris Dodd concludes that it gives new energy to the likelihood of an independent Consumer Financial Protection Agency.  Of course, a committee markup, controversial Senate vote, and harmonization with the House bill present significant opportunities for "death by a thousand cuts," to quote Elizabeth Warren.

Link:  http://bucks.blogs.nytimes.com/2009/11/10/the-status-of-the-consumer-financial-protection-agency/ 

(ag) Nov. 13, 2009, in Financial Regulatory Reform/Consumer Protection

Bernanke Talks About the Role of the Fed After the Crisis

Federal Reserve Board Chairman Ben Bernanke is already looking ahead to the end of the financial crisis and what the role of the Federal Reserve should be then.  He spoke at the Federal Reserve Bank of Boston's 54th Economic Conference, 

Chairman Bernanke called for

• Strengthening standards governing bank capital, liquidity, risk management, incentive compensation, and consumer protection;
• Improving supervision, with greater macroprudential focus, through enhanced consolidated supervision and development of new supervisory tools--including comprehensive horizontal reviews, off-site quantitative evaluations, and more extensive information gathering.
• Comprehensive financial reform by Congress, including strengthening consolidated supervision, setting up a mechanism (such as a systemic oversight council) to identify and monitor risks to financial stability, and creating a framework that allows for the safe unwinding of failing, systemically critical firms.

Link to speech:   http://www.federalreserve.gov/newsevents/speech/bernanke20091023a.htm

(ag) Oct. 26, 2009, in Financial Regulatory Reform

 

Bank Executive Bonuses Contrast with Unemployment Figures

Bank executives are criticized for excessive bonuses, especially when the profitability of their institutions comes more from government bailouts than from market performance.  Unemployment figures in the general economy provide a dismal contrast. 

The Obama administration is pointing out that the institutions giving excessive bonuses are the same ones that accepted government aid and now oppose financial regulatory reform to prevent a future financial crisis.

LInk to story:  http://www.washingtonpost.com/wp-dyn/content/article/2009/10/18/AR2009101802542.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter

(ag) Oct. 19, 2009, in Executive Compensation, Financial Regulatory Reform, Economy

CFPA Update

More than 80 law professors have signed onto the letter to Congress supporting the Obama administration proposal to create an independent Consumer Financial Protection Agency (CFPA).  House Financial Services Chairman Barney Frank placed the letter into the record of hearings last week.

Link to letter:  http://law.hofstra.edu/pdf/Media/consumer-law%209-28-09.pdf

Professor Elizabeth Warren says that reasons to support an independent CFPA can be summed up in five words:  "The credit market is broken."  Professor Warren makes it clear that the broken credit market contributed to the current financial crisis, is helping to perpetuate the crisis, and will cause future crises unless we fix it!

LInk:  http://www.youtube.com/watch?v=lYd08e5Cjvs

(ag) Oct. 9, 2009, in Consumer Protection, Financial Regulatory Reform

Villanova University Law School Symposium on Financial Regulatory Reform

I'm headed to Villanova University School of Law for the Symposium on Financial Regulatory Reform:

2009 Morgan, Lewis & Bockius Symposium on Securities Regulation
Financial Regulatory Reform:  Genesis, Progress, and Impact
Saturday, October 10, 2009

9:15-10:45: Panel 1
Elizabeth F. Brown, “Comparison of the Handling of the Financial Crisis in the United States, the United Kingdom, and Australia”
Eric J. Pan, “The Four Challenges of Financial Regulatory Reform”
Ann Graham, “Consumer Financial Protection:  Is a New Super-Agency the Best Way to Go?”
Joan MacLeod Heminway, “Reframing and Reforming the Securities and Exchange Commission:  Lessons from Literature on Change Leadership”
Moderator:  Jennifer O’Hare
  
10:45-11:00: Break

11:00-12:15: Panel 2
 Ronald J. Colombo, “Trust and Financial Regulation”
Anita K. Krug, “Moving Beyond the Clamor for 'Hedge Fund Regulation:' A Reconsideration of 'Client' under the Investment Advisers Act of 1940”
 Arthur Laby, “Reforming the Regulation of Broker-Dealers and Investment Advisers"
Moderator:  Jennifer O’Hare

12:15-1:30: Lunch

1:30-3:00: Panel 3
Brandon Becker & Jonathan Feigelson, “The Case For an Optional Federal Insurance Charter”
Jeffrey E. Thomas, “Insurance Perspectives on Federal Financial Regulatory Reform:  History, Framework, and Proposals” 
Marc Menchel, “The Changing Regulatory Landscape from the SRO Perspective”
Harvey J. Goldschmid, “The Financial Crisis: What Went Wrong and Where Do We Go From Here?”
 Moderator:  Jennifer O’Hare

(ag) Oct. 8, 2009, in Financial Regulatory Reform

CFPA - Will it be a toothless tiger?

Consumer groups are disappointed in the House Financial Services Committee's plans to weaken the proposed Consumer Financial Protection Agency in response to powerful industry wishes.  A recent article from the consumer perspective refers to the new version of CFPA as "watered down," "less powerful," and "declawed."

Link to story:  http://consumerist.com/5367103/consumer-financial-protection-agency-gets-watered-down

(ag) Sept. 7, 2008, in Consumer Protection, Financial regulatory reform

The Minneapolis Fed - Great Source for TBTF Research Papers

The Federal Reserve Bank of Minneapolis, under the leadership of recently-retired President Gary Stern, has a long list of papers addressing the issue of "Too Big to Fail."

Evolution of Minneapolis Fed Thought:

• Macrostability Ratings: A Preliminary Proposal, Gary Stern and Ron Feldman, June 16, 2009.
  Addressing the Too Big to Fail Problem,
• Gary Stern Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington D.C., May 6, 2009 [PDF]
• Addressing TBTF by Shrinking Financial Institutions: An Initial Assessment Gary Stern and Ron Feldman, April 17, 2009, revised May 20, 2009
• Better Late Than Never: Addressing Too-Big-To-Fail,
  Gary Stern Speech, Washington D.C., March 31, 2009
• Banking Policies and Too Big To Fail,
  Gary Stern Speech, Minneapolis, Minnesota, March 26, 2009
• Prospects for Macro- and Financial Policy,
  Gary Stern Speech, St. Paul, Minnesota, February 5, 2009
• Prospects for Macro- and Financial Policy,
  Gary Stern Speech, Cedar Rapids, Iowa, January 14, 2009
• Too Big to Fail: The Way Forward
  Gary Stern Speech, November 13, 2008
• Policy and the Economy in the Wake of the Shock,
  Gary Stern speech, October 21, 2008
• Limiting Spillovers Through Focused Supervision, The Region, September 2008
• Message from the President
  Introducing the 2007 Annual Report Essay
• Managing the Expanded Safety Net, 2007 Annual Report Essay
• Repercussions from the Financial Shock, Gary Stern speech,
  August 14, 2008
• Too Big To Fail: The Hazards of Bank Bailouts, Excerpt from book by Gary H. Stern and Ron Feldman, The Region, December 2003
• More Information on Too Big To Fail: The Hazards of Bank Bailouts is available from Brookings Institution Press.

Link to Minneapolis Federal Reserve:  http://www.minneapolisfed.org/publications_papers/studies/tbtf/index.cfm

(ag) Oct. 5, 2009, in Financial Regulatory Reform, Economy

Consumer Financial Protection Agency Legislation

Here's what the Conference of State Bank Supervisors (CSBS) reports today about the Consumer Financial Protection Agency (CFPA) debates on the Hill: 

"Chairman Frank Revises Consumer Protection Bill
 
Prior to Wednesday's hearing to gather additional viewpoints on the proposed Consumer Financial Protection Agency (CFPA), House Financial Services Committee Chairman Barney Frank (D-Mass.) released revised draft legislation (H.R. 3126) reflecting a number of changes in response to concerns raised by industry and consumer groups.

CSBS has analyzed the revised bill, noting provisions of interest to state bank regulators. The revised legislation changes the structure of the agency from a five person board to a single director, advised by an oversight board to include the Fed, FDIC, national bank supervisor, NCUA, FTC, HUD, and state representation by the chair of the FFIEC State Liaison Committee.

In  his revised bill, Chairman Frank inserted specific exemptions for certain types of non-financial firms such as retailers, accountants, tax preparation services, real estate brokers and agents, etc.

He also added registration requirements for nonbanks that provide consumer financial products.

The revised bill also changes funding requirements from appropriations and fees and other assessments to having the Federal Reserve transfer 10 percent of total expenses and sets up separate funds within Treasury to cover CFPA expenses for banks vs. nonbanks.

He also set up a dispute resolution mechanism and removed the original requirement that mandated financial institutions providers to offer "plain vanilla" products.

The revised bill maintains the original version's elimination of federal preemption of state consumer protection laws and allows states to go beyond federal standards.

CSBS's support of the measure is contingent on these provisions (elimination of federal preemption and preservation of the "floor not ceiling" provisions) and maintaining a significant role for state regulators in terms of coordination and consultation in rulemaking and examinations.  Additionally, CSBS supports examination by the prudential regulator.  Chairman Frank has indicated he plans to mark up the bill the week of October 12. "

Link to CSBS Examiner:  http://www.csbs.org/Content/NavigationMenu/PublicRelations/CSBSExaminer/Examiner.htm

(ag) Oct. 2, 2009, in Consumer Protection, Financial Regulatory Reform, Federal Preemption
 

Consumer and Banking Law Professors Support Consumer Financial Protection Agency

On September 30, 2009, the House Financial Services Committee, chaired by Representative Barney Frank, will hold hearings on H. 3126, titled “the Consumer Financial Protection Act” which would create an independent Consumer Financial Protection Agency.

Today more than seventy law scholars who teach in fields related to consumer law and banking law have signed a detailed Statement of Support demonstrating their strong views about the importance of this legislation.

I am one of the signatories to this letter urging Congress to put some teeth into consumer financial protection.

Link to Press Release:  http://law.hofstra.edu/NewsAndEvents/PressReleases/pressreleases_20090928_consumer.html

(ag) Sept. 29, 2009, in Consumer Protection/Financial Regulatory Reform

Lessons in Bank Consolidation Issues

From today's CSBS Examiner:

"For every problem, there is a solution that is simple, neat -- and wrong." – H.L. Mencken

"Dateline Perth, Australia - This just in. The continent "down under" has seen such consolidation in its 17-bank financial system that it's now dominated by four big banks. This doesn't sit well with former Prime Minister Paul Keating, who this week publicly chastised his successor for not doing more to preserve competition in the banking sector. According to a report in Perth Now, "Mr. Keating also warns that the growth of the big four banks during the global financial crisis presents a ‘systemic risk’ to the Australian economy."

Sound familiar? A world away, we find ourselves fighting the same "too big to fail" battle but with little evidence of the will in Washington that’s needed to resolve its root causes.    While painful to acknowledge, a handful of the biggest banks and Wall Street firms have become the new GSEs with implicit government backing and are competing against the 8,000 other banks whose lifelines are their own bootstraps.  Let’s hope that the lessons of Fannie and Freddie haven’t been lost in Washington."

(ag) Sept. 25, 2009, in Financial Regulatory Reform

Regulatory Turf Wars Impede Comprehensive Financial Reform

In the wake of the current financial crisis, the U.S. financial regulatory structure needs dramatic overhaul.  Following the Market Crash of 1929, the U.S. adopted many sweeping reforms that worked well for at least half a century.  We stand at another such crossroads.

It would be admirable if current regulators could look at the big picture instead of guarding their own territory.  Shilling for the status quo is not good for the country as a whole.

My review of OCC testimony before the House Financial Services Committee on September 23, 2009, yields stong concerns that the focus at OCC is much too self-centered.

1.  The OCC opposes giving the Fed, as systemic regulator, the power to override OCC.  Wait a minute, we would be talking about a situation that could affect the entire economy.  Why should national banks be exempt from nation-wide systemic regulation? 

2.  The OCC supports the proposed Consumer Financial Protection Agency (CFPA) in principle, but again argues that this new national approach should exempt national banks and allow OCC to enforce consumer protection laws.  The OCC did not have the resources or the will to do this job in the past.  What has changed?

The OCC opposes giving the CFPA any ability to check on compliance with consumer protection rules.  Again, why exempt national banks?  Each federal banking agency now has a special team of examiners who conduct "compliance exams" separate from "safety and soundness exams."  So there is no logical reason to oppose granting the agency responsible for writing all consumer protection regulations the power to examine all financial institutions, including national banks, for compliance with those same regulations.  Discussions about staffing the new agency suggest that the existing compliance examiners from all federal banking agencies, including OCC, would simply move to the new agency.  Why not assume that CFPA would cooperate with state and national agencies responsible for safety-and-soundness?  There is already a well-established, successful model for cooperation between Federal Reserve examinations and state bank examinations.  Surely the national bank regulator, whatever that may look like in the future, could also cooperate with others.     

3.  The OCC opposes any rollback of federal preemption that would allow states to address problems like predatory lending within their borders.  There's no mention of the fact situation in Cuomo v. Clearing House Association, in which national banks and the OCC stonewalled efforts to get more information about apparent racial discrimination in residential loans made by national banks in New York.  There's also no mention of the fact situation in Wachovia v. Watters, in which a nonbank state corporation engaged in mortgage lending purposefully escaped state regulation by becoming a subsidiary of a national bank.  Not a great track record of enforcing any kind of consumer protection or of cooperating with the states.  Absent dramatic changes, the OCC is not the place to lodge any kind of consumer protection powers.  As Congressional testimony indicates, OCC's only concerns focus on the fact that different standards in different states would cut into the profitability of national banks. 

4.  Of course, they support merging OTS into OCC.  Not that reasonable minds differ on this point, but it would be informative for the record to show the rationale, other than enlarging regulatory territory.  This gets one line in OCC's Congressional testimony:  "And we support the proposal to effectively merge the OTS into the OCC."

The purpose of this post is to express concern that all existing regulators should do what is best for the economy and financial institution regulation as a whole instead of shielding their own turf and their own regulated entities at the expense of a comprehensive financial regulatory structure.  No agency and no charter is an island.

Congress needs to take the difficult but statesman-like path to well-reasoned, comprehensive regulatory reform.  Otherwise, we'll be in the middle of the next financial crisis before we can fully recover from this one.

LInk to Testimony:  http://www.occ.gov/ftp/release/2009-110a.pdf

 (ag) Sept. 25, 2009, in Financial Regulatory Reform

 

Financial Crisis Inquiry Commission Up and Running

Today's Forbes.com article by Anne Flaherty, "Panel begins inquiry into financial meltdown," reports that the 10-member Financial Crisis Inquiry Commission is beginning its investigation of large financial firms involved in the crisis, including Lehman Brothers, Bear Stearns, Citigroup, AIG, Freddie Mac, and Fannie Mae, with a report expected to be issued before year-end. 

Will we see productive analysis or fingerpointing?

Link:  http://www.forbes.com/feeds/ap/2009/09/17/general-financials-us-financial-meltdown-commission_6900070.html

(ag) Sept. 17, 2009, in Economy, Financial Regulatory Reform

Thanks to one of the readers of this blog for pointing out this article!

Status Report on Financial Stabilization

The Treasury Department has issued a Status Report on Financial Stabilization Efforts to date.  Treasury Secretary Timothy Geithner described the current state of government intervention as having moved "from crisis response to recovery, from rescuing the economy to repairing and rebuilding the foundation for future growth.  The critical imperative we face as a country is making sure that the same vulnerabilities in our system which gave rise to this recession are not allowed to trigger another. To do that, we must pass comprehensive regulatory reform legislation by the end of the year."

Link:http://www.treasury.gov/press/releases/tg285.htm

(ag) Sept. 16, 2009, in Economy, Financial Regulatory Reform

Today's Scary Story Says the Biggest Banks Are Regaining Their Appetite for Risk

AP Reporter Stevenson Jacobs' story entitled "Risk Taking Is Back for Banks One Year After Crisis" provides disturbing data on bank investment activities.  The conclusion is that significant systemic risk remains unaddressed as yet. 

LInk:  http://news.yahoo.com/s/ap/20090913/ap_on_re_us/us_meltdown_same_old_wall_street

(ag) Sept. 13, 2009, in Economy, Financial Regulatory Reform

Higher Fees Proposed for "Systemically Significant" Banks

Top White House economic adviser Lawrence Summers supports higher fees for "systemically significant" banks as part of the regulatory reform package sought as a result of the current economic crisis.  Higher fees would be an incentive not to grow "too big to fail." 

Link to story:  http://www.star-telegram.com/business/story/1607247.html

(ag) Sept. 11, 2009, in Economy, Financial Regulatory Reform

Washington Post & Too Big To Fail

On Friday, the Washington Post ran a feature on the "too big to fail issue," complete with data to demonstrate that the big have gotten bigger as a result of the bailouts.  Will this issue be addressed in the regulatory reform legislation working its way through Congress?  It's sure to meet well-organized, well-funded opposition to any "breakups" a la Ma Bell and the Baby Bells.  Antitrust is a dead language. And "free market" only means "let me do what I want until I get in trouble, just bail me out if I stumble." 

Link:  http://www.washingtonpost.com/wp-dyn/content/discussion/2009/08/28/DI2009082801337.html

(ag) August 29, 2009, in Economy, Financial Regulatory Reform

Congress Will Have to Develop a Back Bone to Get Past Turf Wars

NPR attributes delays in regulatory reform legislation to turf battles among the Federal Reserve, the OCC, and the FDIC.  I'm not surprised about that -- it's business as usual:  One part substance, three parts "enlarge and preserve my territory."  Can Congress get past the turf wars and pass meaningful regulatory reform legislation?  We'll see.

Link: http://www.npr.org/templates/story/story.php?storyId=111392530

(ag) July 30, 2009, in Financial Regulatory Reform

Wake Up and Smell the Roses -- or Whatever -- at OCC!

I continue to be appalled but not surprised that Comptroller John Dugan can still argue against state consumer protections because the costs "will be ultimately be borne by consumers."  As if consumers are not bearing the costs of the OCC's shameless history of focusing only on standardization for national banks, preemption of state law regardless of purpose, and maximization of short-term bank profit whatever the long-run consequences! 

This agency is part of the problem we are living with today.  The current administration and Congress need to take this agency and its senior staff to the woodshed.  What will it take for them to recognize that all banking agencies must refocus and that consumer protections cannot continue to be disregarded?  A national banking crisis?  Oh, we have that -- well then, what????   It is clear that without a good housecleaning, this agency will not "get it."  There is no reason -- other than short-term greed -- why national banks cannot comply with reasonable state consumer protection laws.  There is also no reason -- other than arrogance and agency capture -- why the national banking supervisor cannot cooperate with state regulators to assure consumer protections.  

Link to OCC Statement about "Regulatory Reform as long as the OCC gets to keep doing exactly what it has been doing":  http://occ.treas.gov/ftp/release/2009-88.htm

(ag) July 28, 2009, in Consumer Protection, Economy, OCC, Dual Banking System, Financial Regulatory Reform

An Aggressive Timetable for Regulatory Reform

Congress is diligently holding hearings and the Treasury Department urges passage of financial regulatory reform by year end.  We need reform, no doubt about it.  However, there are many plans on the table and no consensus.  If Congress acts in haste, we may repent at leisure.  I'd like to see more persuasive data on:

• Whether a new and separate Consumer Financial Protection Agency is the best way to go -- or whether it is better to keep consumer protection linked to safety and soundness regulation but to add a strong mandate to regulators concerning the importance of consumer protection;
• How to maintain and strengthen the dual banking system in order to provide a counterweight to excessively concentrated power in a single national charter and a single national prudential regulator.  Monopolistic regulation is a sure-fire recipe for disaster!!!
• How much and what types of power to give the Federal Reserve to address systemic risk across industries beyond banking.
• How to end expectations that some institutions are "too big to fail."  This is moral hazard at its apex.  Market giants create their own rules and decry government regulation -- until they need a bailout.  I've said it before:  Too big to fail is too big!
• How to structure capital requirements that really do buffer losses appropriately.
• What international financial regulatory structures should look like.

Congress could make things a lot worse with speedy, but poorly designed legislation. 

 Link to Voice of America story about Geitner's timetable:  http://www.voanews.com/english/2009-07-24-voa43.cfm

Link to Obama Plan:  http://www.financialstability.gov/docs/regs/FinalReport_web.pdf

Link to Group of Thirty Plan:  http://www.group30.org/pubs/pub_1460.htm

Link to Committee on Capital Markets Regulation Plan:  http://www.law.harvard.edu/news/2009/06/16_scott.html

LInk to Financial Services Roundtable Plan:  http://www.fsround.org/policy/regulatory/pstatements/pdfs/Regulatory_reform_principlesandarchitecture_Jan29.pdf

(ag) July 27, 2009, in Economy, Financial Regulatory Reform

No More Too Big To Fail

FDIC Chairman Sheila Bair testified Thursday before the Senate Committee on Banking, Housing and Urban Affiars.  I could not agree more with her view that "too big to fail" is a concept we need to dispense with.

"We must find ways to impose greater market discipline on systemically important institutions. In a properly functioning market economy there will be winners and losers, and when firms -- through their own mismanagement and excessive risk taking – are no longer viable, they should fail. Actions that prevent firms from failing ultimately distort market mechanisms, including the market's incentive to monitor the actions of similarly situated firms. Unfortunately, the actions taken during the past year have reinforced the idea that some financial organizations are too big to fail. The solution must involve a practical, effective and highly credible mechanism for the orderly resolution of these institutions similar to that which exists for FDIC-insured banks. In short, we need an end to too big to fail."

Link:  http://www.fdic.gov/news/news/speeches/chairman/spjuly2309.html

(ag) July 25, 2009, in Economy, FDIC, Financial Regulatory Reform