Regulating Large Financial Institutions
The recent financial crisis brought forth a new phenomenon: financial institutions deemed “too big, too systemically important or too complex to fail.” These required massive financial support at great cost to the public. Regulators and officials are committed to reining in these institutions through a variety of measures. Some are modest, such as a special levy on systemically important banks to fund a crisis resolution facility. Others are more sweeping: ring-fencing portfolios at deposit-taking institutions, restricting some lines of business at these large institutions, or even banning ownership of certain investment vehicles by commercial banks. A few proposals even suggest regulating deposit-taking institutions like public utilities. It is important to evaluate these proposals carefully as fundamental changes in the structure of the financial system can create new complexity in tracking financial flows and cloud our understanding of the future sources of systemic risk.
CFS explores these proposals in detail, both in our own research and through expert discussions in the Policy Forum. The objective is to promote a thoughtful public dialog on the framework for reform, the structure of the financial system post-reform, and the implications of these proposals for the economy and the provision of financial services in the future.
Proposals for Regulatory Reforms
Micro-prudential (at the bank level)
- Resolution authority and “living wills”
- Special charges on Systemically Important Financial Institutions (SIFIs)
- Resolution fund for SIFIs in the event of a crisis.
- Ring-fence bank portfolios funded by retail deposits
- Limit on bank shares of overall retail deposit base
- Limit on bank ownership of hedge / private equity funds
- Limit on bank business lines, e.g. proprietary trading or insurance.
Research Notes
MetLife and “Why Systemic Risk Considerations Affect the Market for Long-Term Care Insurance”
October 26, 2011
The announcement yesterday that the Federal Reserve had denied MetLife’s request for approval of its capital distribution plan does not come as a surprise to us at the Center for Financial Stability (CFS).
It has been nearly a year since MetLife announced its decision to exit the long-term care insurance market. On January 14, 2011, CFS Senior Fellow Robin Lumsdaine highlighted in a report how that decision related to the debate on capital requirements for systemically-important institutions.
In a new report, Dr. Lumsdaine highlights the potential threat to the long-term care insurance market from an unexpected source: financial regulation aimed at mitigating systemic risk.
The work is timely and critical as HHS Secretary Sebelius noted in an October 14 letter to Congress that “despite our best analytical efforts, I do not see a viable path forward for CLASS [Community Living Assistance Services and Supports Act] implementation at this time.” Sebelius’ comment highlights challenges in devising a public sector solution to the projected strain associated with future long-term care costs. Private sector solutions are proving equally elusive.
Click here to see Robin Lumsdaine’s Economists’ Voice article.
Press Alert – Fed Denies MetLife Request...
October 25, 2011
Today's Federal Reserve denial of MetLife‘s request for approval of its capital distribution plan does not come as a surprise to us at the Center for Financial Stability (CFS).
It has been nearly a year since MetLife announced its decision to exit the long-term care insurance market.
On January 14, 2011, CFS Senior Fellow Robin Lumsdaine highlighted in a report how that decision related to the debate on systemically -important institutions. Dr. Lumsdaine is available for discussion and comment.
The CFS report noted:
- MetLife is a Bank Holding Company (BHC).
- MetLife‘s size lumps it into the group of systemically-important financial institutions — therefore subjecting it to more stringent capital regulations than many of its insurance-industry peers.
- As a large insurance company, MetLife‘s business model differs from that of most BHCs. In particular, it relies extensively on the use of derivatives contracts to hedge its long-dated liabilities.
- The report emphasized that new capital requirements could deal a destabilizing blow to the viability of the long-term care insurance market.
Since then, MetLife has announced plans to sell its depository with an eye toward eventually ceasing to be a BHC.
On October 14, HHS Secretary Sebelius noted in her letter to Congress that she did not see “...a viable path forward for CLASS [Community Living Assistance Services and Supports, the public sector long-term care program] Implementation at this time”.
Today‘s Federal Reserve ruling further underscores this important topic.
Senior Fellow Robin Lumsdaine, can be reached here.
Straight Talk from a Practitioner: Notes from Under the Wall
July 22, 2011
Steven Lofchie writes "Straight Talk from a Practitioner: Notes from Under the Wall." The report covers his thoughts on Dodd-Frank one year after passage and was just published in the Harvard Business Law Review Online.
Click here to read the full report.
The Market for LTC Insurance and Systemic Risk
Robin L. Lumsdaine
January 14, 2011
Center for Financial Stability Senior Fellow Robin Lumsdaine discusses why the private long-term care (LTC) insurance market may be under serious threat and relevant for the systemic risk debate.
In addition to an aging population and rising LTC inflation, new capital requirements and financial regulation could discourage insurance company participation in this important market and deprive individuals of affordable policies.
Click here to view the report.
Opinions and Editorials
How to Contain a Financial Crisis without Bailouts
March 22, 2012
Today Forbes published an essay by Bruce Tuckman, Director of Financial Markets Research at the Center for Financial Stability. He argues for the creation of a new instrument - the Federal Liquidity Option - to contain periodic liquidity crises.
Four years after the fall of Bear Stearns our fallback policy in a crisis is just as it was in 2008: rely on emergency, ad hoc lending by the Fed. We should not settle for this approach.
To read more about Federal Liquidity Options.
Is What‘s Good for MetLife Good for Us All?
Robin Lumsdaine
October 28, 2011 - American Banker
On Oct. 25 MetLife announced that the Federal Reserve had denied its request for approval of its capital distribution plan that included a dividend increase and resumption of stock repurchases. Likely it is a reflection of a prudent regulator. Rather than make an isolated determination on a single company, the Fed probably prefers to await results from its planned 2012 cross-institution analysis of the largest U.S. bank holding companies. MetLife's participation in that analysis underscores its systemic importance.
Click here to view the report.
“Stronger” Banks, Weaker Economies
Steve H. Hanke
August 2011 - Globe Asia
Since the Panic of 2008-09, if not before, the economic and financial regulatory agencies have been beating the drums for banks to raise fresh capital and strengthen their balance sheets. And if banks can’t raise more capital, they are told to shrink the amount of risk assets (loans) on their books. Furthermore, we are told that, to avoid future crises, banks must be made stronger.
They assert that more capital has made the banks stronger and safer. While at first glance that might strike one as a reasonable conclusion, it is not the end of the story.
Click here to view the report.
