FinReg21 Exclusive Bill Commentary
Financial Regulation, a Slightly Optimistic View
Friday 25 September 2009 17:52 | James Kwak | 309 comments|
The big news on the regulatory front last week was the Wall Street Journal’s revelation that the Federal Reserve will give its regulators the ability to reject any pay package for any bank employee that encourages excessive risk-taking. The Fed is apparently claiming this authority on the grounds that as a safety-and-soundness regulator, it has the right to prohibit any bank practices that threaten the safety and soundness of the bank. Sounds good to me. |
House Leader Circulates Draft of SEC Reform and Investor Protection Legislation
Monday 05 October 2009 00:43 | James Hamilton | 311 comments|
Draft legislation that would impose a uniform fiduciary standard on brokers and advisers, eliminate mandatory arbitration of brokerage disputes, and enhance the SEC’s authority to impose sanctions on and seek remedies from individuals who violated the securities laws but who are no longer associated with a regulated firm has been circulated by Rep. Paul Kanjorski, Chair of the House Subcommittee on Capital Markets. Broadly, the legislation would enhance investor protection, strengthen capital market competitiveness, make the SEC a more effective agency, and make the PCAOB and the SEC more accountable to the capital markets. The draft would also double the authorized funding for the SEC over five years and provide dozens of new enforcement powers and regulatory authorities. The SEC will be able to enhance its enforcement programs and gain the tools needed to better protect investors and police today’s markets. Further, because mandatory arbitration has limited the ability of defrauded investors to seek redress, the SEC will gain the power to bar these clauses in customer contracts. In addition, every financial intermediary who provides advice will have a fiduciary duty toward their customers. Through a harmonized standard, broker-dealers and investment advisers will have to put customers’ interests first. |
"Prudent" Financial Regulation
Thursday 22 October 2009 22:14 | Kevin Funnell | 433 comments|
"Over at the Financial Post, Jagadeesh Gokhale and Peter Van Doren meet calls for tighter regulation of financial institutions with the argument that tighter regulation won't make things better, it will make things worse. I've heard many argue that financial institution deregulation following adoption of the Gramm-Leach-Bliley Act a decade ago, coupled with the Federal Reserve Board's policy of keeping interest rates low, caused the current crisis or at the very least, were the major fuels that caused it to burn as fiercely as it has. Gokhale and Van Doren disagree. First, they don't believe that economists can detect coming bubbles (like the housing price bubble) even when the indicators run up and bite them in the backside. Even if they could, we doubt the Fed would have altered its policy in the early 21st century, and we suspect that political leaders would have exerted considerable pressure to maintain that policy. Yes, but current day arm chair quarterbacks claim they could have seen it all coming and would have turned the tide. You don't believe that? Well, you aren't reading the comment boxes of blogs, are you? No, neither am I. As to tighter regulation, Gokhale and Van Doren believe that simply would not have helped avert disaster..." |
A Bailout For Pensions?
Friday 30 October 2009 17:53 | Daniel Indiviglio | 436 comments|
"This recession has taken a toll on most investments. Even though the stock market has improved recently, it's no where near its 2007 highs. Real estate prices are also still quite low. Given all of that, it probably comes as no surprise that many pension funds are in a lot of trouble. As you might have guessed, the government wants to help. Pension funds are under certain regulatory constraints to maintain prescribed funding levels. Many have fallen below the levels where they should be, but Congress is considering a bill to extend the time companies have to replenish their funds. The New York Times reports on this possibility: To discourage companies from joining the many businesses that have frozen pension benefits for workers, Congress would also give employers up to 15 years to fully fund their plans if they agreed not to freeze benefits.Why might Washington care about this? Well, the obvious reason is that they don't want Americans who were promised pensions to suddenly not get what they expected. But there's a more subtle reason: businesses that owe former employees pension payments might have to use profits for this replenishment if their investments' value do not rise quickly enough to meet the requirements the funds are under. As a result, revenue will be going towards pensions that could have gone towards more hiring. With unemployment near 10%, that's not good. So what's the problem with this legislation? It puts the funds at risk. Pension rules are there for a reason -- so that people get the payments they were promised. What happens if pensions begin failing as a result? Well, the government already has a solution for that. Sort of. In case you didn't know (and I didn't) there's a government body out there called the "Pension Benefit Guarantee Corporation." In a similar way to how the Federal Deposit Insurance Corporation steps in when banks fail, the PBGC steps in when pensions fail. And just like how the FDIC's insurance is funded by fees paid by depository institutions, the PBGC's insurance exists thanks to premiums paid by pensions. According to The Times, since 1974, the PBGC has saved the pension plans of around 4,000 companies..." |
GAO to Congress on Interchange Fee Regulation: Yellow Light
Wednesday 25 November 2009 06:10 | David S. Evans | 442 commentsLast week the General Accountability Office (GAO) released it much awaited report on interchange fees. Congress had asked the GAO, the respected investigative arm of Congress, to wade into this battle between merchants and cards systems earlier this year when it passed the CARD Act. There's something for everyone in this report which is why both merchant and cardholder advocates are claiming that it backs their positions. Here's what GAO finds:
- Consumers who use credit cards have benefited from competition in credit cards with lower fees and more rewards although consumers who don't use credit cards may face higher prices because merchants pass along the cost of acceptance.
- Merchants are paying more for interchange fees because consumers are using cards more and because MasterCard and Visa have raised some rates.
- Merchants receive benefits from accepting credit cards but at least some merchants claim that the costs outweigh the benefits.
- Reducing interchange fees to merchants could result in consumers paying higher fees and getting less rewards but consumers might also benefit from lower prices.
The GAO's bottom line is: "Although various options to lower interchange fees exist, impacts on cardholders could be mixed and each option has implementation challenges."
Although both sides can point to sound bites from the report that back their positions I think a fair reading of the GAO's conclusion is that it presents a "yellow light" to Congress. (It is more or less consistent with the warning that I gave Congress in my recent testimony. Even though it sometimes couches the findings in tentative prose the GAO seems to agree that reducing interchange fees will result in people paying more to use credit cards, having less availability of credit, and having reduced rewards. It cites the experience in Australia where there is really no controversy over the fact that fees went up and rewards went down as a result of the halving of interchange fees there. It recognizes that there's a flip side to this. Merchants will pay less for taking cards and might pass on some of those savings to consumers. One can debate the extent to which this will happen and how long it will take but there's widespread agreement that since we're talking about small saving per transaction that it is almost impossible to measure and verify these benefits.
The GAO Report does not present any findings that would support the regulatory interventions being advocated by merchants and that are covered to various degrees by some of the bills winding their way through Congress. There is nothing that suggests that consumers overall will benefit from interchange fee caps. In the best of worlds reducing interchange fees will take money out of one pocket (from the higher cost to consumers for cards) and put it in another pocket (the lower cost at check out). The GAO Report mentions benefiting consumers that don't use cards but there aren't many such people and they don't spend much. There is also nothing in the report that concludes that society would be better off if merchants could steer consumers to cash and checks. It seems counterintuitive that we'd be better off continuing to use paper-based payment methods that originated centuries ago rather than electronic methods.
If I were a member of Congress I'd also be pretty concerned about the GAO's conclusions from a purely political perspective. Consumers will not perceive Congress as having done them any favors if measures to reduce interchange fees are passed. They will pay higher fees for cards and they will have their rewards slashed. They won't notice any savings at checkout even if there are some. We already saw this movie in Australia.
