In testimony today before the House Financial Services Committee, SIFMA president and CEO Tim Ryan discussed the impact of regulatory reform efforts, highlighting the importance of these efforts while also stressing that “it is equally important that policy makers, market participants, investors and consumers understand the magnitude and collective impact of these actions and their effect on U.S. markets, the economy and the lives of ordinary Americans.”
Mr. Ryan discussed the importance of the healthy and vibrant financial services sector to the U.S. economy, concerns related to the aggregate impact and fragmentation of global regulatory reforms, and the potentially negative impact of certain regulatory reforms. He also posed three questions, one dealing with designation criteria globally systemically important financial institutions (G-SIFIs), the second on the need for and size of a special additional capital surcharge on G-SIFIs to mitigate systemic risk and the third on status of regulatory implementation of Dodd-Frank.
In the context of regulatory reform, Mr. Ryan highlighted SIFMA’s views that costs to the economy must be taken into account to ensure that the economic costs do not outweigh the benefits to increased safety, and that rules must be consistent across jurisdictions and coordinated on a global level in order for the U.S. to maintain its position as the deepest, most liquid and most innovative financial market in the world. SIFMA also believes a thorough analysis of the aggregate impact the proposed regulations will have on economic growth should be completed.
“While the regulatory reform and repair measures taken to date have put the U.S. and global financial systems on sounder footing, it is also the case that a number of measures, either create, or risk creating, divergences that could raise costs to investors, unnecessarily increase the complexity of compliance, hinder global efforts to cooperate and coordinate regulation, and at their worst provoke retaliatory measures by other jurisdictions, ultimately resulting in a drag on global economic recovery,” said Mr. Ryan.
Mr. Ryan discussed SIFMA’s support for the concept of resolution authority, which would provide for the orderly wind down of a failing institution in the U.S., noting he believes significant progress has been made in establishing a resolution framework both in the U.S. and across borders which will mitigate systemic risk.
In light of this progress, SIFMA disagrees with the discussion underway by the Financial Stability Board which would impose an additional capital charge for globally systemically important financial institutions. Under the Basel III capital accord, banks are already required to make significant increases in the quality and quantity of their capital. Any additional capital requirements in excess of those already imposed by Basel III should be carefully considered in the context of potentially negative economic consequences in terms of lower credit availability and a higher cost of capital for the financial system as a whole.
“Excessive capital charges make it more expensive for banks to lend money or provide liquidity to U.S. businesses. The result inevitably will be higher cost of credit and less credit and less funding availability,” said Mr. Ryan.
Given the global nature of the derivatives marketplace, SIFMA highlights the importance that reforms related to derivatives give careful consideration to extraterritorial application of regulations by refraining from unnecessarily regulating conduct outside national borders while appropriately allocating supervision of cross-border swaps activities in a way that protects U.S. markets and counterparties and avoids duplicative and inconsistent regulations. In addition, SIFMA believes regulators should aim to sequence the phase in of derivatives rulemaking implementation in order to avoid market disruptions; data reporting to regulators to inform future rulemaking and rules aimed at reducing systemic risk should be prioritized. Further we recommend that the Commissions allow for and additional comment period once revisions are completed.
Because application of the derivatives provisions under Dodd-Frank will involve the interaction of rules relating to different asset classes and products along with differences among rules imposed by different U.S. and non-U.S. regulators, understanding these interactions and sequencing implementation of the rules accordingly will create a more robust regulatory structure.
In discussion of the Volcker rule, which prohibits proprietary trading and sponsorship and investment in hedge funds and private equity funds by U.S. banks and their affiliates and foreign banks and affiliates operating in the US, Mr. Ryan notes, “if implemented in a way that is overly restrictive for market making, hedging, the Volcker Rule could harm liquidity in the U.S. market, constrain capital formation, restrict credit availability to the consumer and business, and thus, undermine the nation’s fragile recovery. Further, it could hasten further loss of U.S. market share in debt and equity issuance to other nations since issuers and investors demand liquidity as a function and preference of markets in which they issue and list.”
Mr. Ryan’s testimony was delivered at a hearing titled “Financial Regulatory Reform: The International Context.”