In the American Banker Regulatory Symposium, Martin J. Gruenberg (Acting Chairman, FDIC) made remarks on three topics: the conditions of the banking industry, an overview of the progress being made by the FDIC and the Federal Reserve on the resolution plans or so-called “living wills,” and the FDIC’s community banking initiatives. The FDIC is also taking a closer look at the examination process for risk management and compliance supervision.

Lofchie Comment:  Chairman Gruenberg’s speech overlaps in content to some extent with the GAO report on community banking.  He mentions both regulatory costs and technology costs as potential particular burdens for small institutions; and of course the two costs are often closely related. 

View speech in full here (links externally to FDIC website).

This report examines (1) the significant changes community banks and credit unions have undergone in the past decade and the factors that have contributed to such changes, and (2) Dodd-Frank Act provisions that regulators, industry associations, and others expect to impact community banks and credit unions, including their small business lending.

GAO analyzed regulatory and other data on community banks and credit unions; reviewed academic and other relevant studies; and interviewed federal regulators, community banks, credit unions, state regulatory and industry associations, academics, and others. CFPB, federal banking regulators, and the Securities and Exchange Commission provided technical comments on this report, which GAO incorporated as appropriate. CFPB and the National Credit Union Administration generally agreed with the report.

Lofchie Comment:  The report takes up two related, but distinct, questions: (i) will Dodd-Frank rule makings raise costs for small banks in an absolute sense; and (ii) how will any such change in expenses affect small banks’ competitive position relative both to large banks, on the one hand, and non-banks engaged in like activities on the other. The report largely ducks the first question, pointing to the fact that there are hundreds of regulations still to be adopted whose cost therefore cannot be assessed (on the other hand, lots of regulations generally do entail at least some costs). As to the competitive question, the report is ambiguous. It points out that regulatory costs are to a good extent fixed costs, and thus these tend to hit smaller institutions more than larger. On the other hand, it raises the possibility that Dodd-Frank regulations may hit both larger banks and nonbanks harder than small banks, thus improving small banks’ position relative to their competitors. Although the report is inconclusive, it does provide some interesting discussion not only of regulatory costs, but also of the ways in which regulations are being imposed in different ways on different types of institutions; e.g., that the CFPB will not directly regulate small banks. This raises questions as to the extent to which differential regulation should be used to give some firms a competitive advantage.  For details on this point, see Appendix II, from pages 72-77.  The section descriptions (beginning on page 73) detail the various Dodd-Frank provisions that are expected to impact small banks and credit unions, as well as the special exemptions that they receive.

View report in full here (links externally to GAO website).

The SEC announced “first-of-its-kind” charges against the New York Stock Exchange for compliance failures that gave certain customers an “improper head start” on trading information ahead of ordinary public customers.

According to the SEC’s order against NYSE, the exchange violated SEC Regulation NMS over an extended period of time beginning in 2008. The NYSE allegedly sent data through two of its proprietary feeds before sending data to the consolidated feeds, and failed to monitor the speed of its proprietary feeds compared to its data transmission to the consolidated feeds.

Lofchie Comment:  The issue that the SEC press release most trumpets is the financial penalty against the exchange.  However, there are a few other aspects of the case that seem interesting: (i) it is not clear the extent to which the rule violation was caused by a commission or an omission; (ii) the order very much emphasizes the importance of involving the compliance department in technological processes; and (iii) as with the recent settlement involving Nasdaq, this order may raise the question as to whether exchanges should have immunity from actions brought by their customers. 

View SEC Order Against NYSE (links externally to SEC website).
See also: SEC Press Release; SEC Chart of NYSE Data Feeds.

The Dodd-Frank Act created the Financial Stability Oversight Council (FSOC) to identify and address threats to the stability of the U.S. financial system and Office of Financial Research (OFR) to support FSOC and Congress by providing financial research and data. In this report, the GAO was asked to examine (1) any challenges FSOC and OFR face in fulfilling their missions (2) FSOC and OFR’s efforts to establish management structures and mechanisms to carry out their missions, (3) FSOC and OFR’s activities for supporting collaboration among their members and external stakeholders, and (4) the processes FSOC used to issue rules and reports. GAO reviewed FSOC documents related to the annual reports, rulemakings, and committee procedures, as well as documents on OFR’s budget, staffing, and strategic planning. GAO also interviewed FSOC and OFR staff, FSOC member and member agency staff, and external stakeholders, including foreign officials, industry trade groups, and academics.

GAO made 10 recommendations to strengthen the accountability and transparency of FSOC/OFR’s decisions as well as to enhance collaboration among FSOC members and with external stakeholders. Treasury said that the council and OFR would consider the recommendations, but questioned the need for FSOC and OFR to clarify responsibilities for monitoring threats to financial stability and stated that OFR expects to share some risk indicators.

Lofchie Comment:  In addition to commenting on the performance of FSOC and OFR, the GAO report provides a good general description of the agencies’ resources and purposes for those who have an interest in the crisis and the response. One of the provisions of Dodd-Frank that I think most problematic is the power of FSOC under Title II of Dodd-Frank to designate certain financial institutions as being of systemic importance and so to impose on those institutions, selected by largely subjective means, substantial additional regulations likely to put them at material competitive disadvantage.  The subjectivity of such designations gives a great discretionary power to the government that could be used to favor or disfavor market competitors. From that perspective, I view the report as confirming my concerns. For example, page 22 of the Report makes clear that FSOC does not really have any commonly-agreed method to assess systemic risk, and the report concludes that FSOC’s workings are not transparent. 

View report in full here (links externally to CFTC website).
Additional Materials: Recommendations for Executive Action.