regulatory reform

Further losses expected from commercial real estate will continue to pressure the US banking system, the International Monetary Fund has said in its first detailed assessment of the US economy. Delinquent commercial real estate loans in the US are rising, and currently estimated at $60.45bn, or 7.87 per cent.

The Dodd-Frank Act was “an important step forward to address the weaknesses exposed by the global financial crisis,” said the report, issued under the Financial Sector Assessment Program. But stress tests carried out by the IMF noted that “the system would likely remain under pressure due to expected further losses in the commercial real estate sector. And in a scenario in which growth dropped and unemployment remained high, a significant number of U.S. bank holding companies—especially small and medium-sized and regional banks—would need additional capital.” 

James Politi

The Federal Reserve rarely comments on the passage of a single piece of legislation. But this time, Ben Bernanke, Fed chairman, could not resist.

After winning all of the biggest battles in the fight over financial regulatory reform – cementing the Fed’s power while safeguarding its independence – Mr Bernanke put out a statement today praising passage of the bill in the Senate, calling it a “welcome and far-reaching step toward preventing a replay of the financial crisis.” President Barack Obama’s signature on the legislation is expected in the coming days. 

“It is odd that the new regulatory structure makes an unrepentant BOE even more powerful with respect to regulatory matters,” writes former MPC member Sushil Wadhwani in The Future of Finance, a collection of essays. “In my time at the MPC at the Bank, I was surprised by the lack of interest in issues relating to financial markets. Indeed there seemed to be a deliberate policy to run down resource in the Financial Stability wing.”

Strong words. But the argument against giving regulatory powers to the Bank of England is not, however, that they don’t deserve them. Rather, Dr Wadhwani argues that monetary policy and macro-prudential policy need to be able to work against each other, or, as he puts it, “the use of monetary policy to ‘lean against the wind’ is critically important in its own right and to the success of the ‘macroprudential’ policy to be adopted by the [Financial Policy Committee].”

James Politi

We’re in the last throes of the battle over financial regulatory reform, and Barney Frank, the chief congressional negotiator on the legislation and chairman of the House financial services committee, today suggested a possible compromise on the Federal Reserve – one that would strip the three banker board members of the right to select regional bank presidents, but would safeguard the position of NY Fed president from political appointment.

It still needs to be voted on by the conference of lawmakers charged with reconciling the Senate and House versions of the bill, so nothing is etched in stone. But his proposal merits attention because it could be an elegant way to resolve the remaining differences.

Gone would be the controversial proposal to make the president of the Federal Reserve Bank of New York a political appointee – which was seen by some critics of the measure as a misguided attempt to politicise the US central bank. 

Key points of the bill:

Related reading: full list of key points or the main news article.

Thoroughly recommended, from Howard Davies & David Green:

There are areas in the coalition agreement where mating a pure-bred Tory policy with a pedigree Liberal Democrat manifesto commitment has produced a mongrel, but in the area of financial regulation the opposite is the case… The formal statement says the government will “give the Bank of England control of macroprudential regulation and oversight of microprudential regulation”. We may presume from this that day-to-day institutional supervision will remain with the FSA. That makes sense. 

Simone Baribeau

Sheila Bair, the chairman of the FDIC, today spoke on regulatory reform. Her comments were nothing surprising or new. She called for the creation of a resolution mechanism for large failing institutions, more sharing of information between regulators, and strengthening consumer protections.

But one interesting statement: