The Banking Crisis and Regulatory Restructuring

July 24, 2009

Financial Crisis

• It can fairly be said that the chain of catastrophic bets made over the past decade by a few hundred bankers may well turn out to be the greatest nonviolent crime against humanity in history. They’ve brought the world’s economy to its knees, lost tens of millions of people their jobs and their homes, and trashed the retirement plans of a generation, and they could drive an estimated 200 million people worldwide into dire poverty…Bankers are now thought of as Paris Hilton in pinstripes—showy, thoughtless souvenirs of an age and a culture we wish to forget. – Graydon Carter, Editor, Vanity Fair, June 2009

Financial Crisis

• Minimum value of governmental bailouts of the global financial industry since 2007, per capita, worldwide: $1,250

• Amount this represents as a percentage of the median annual income worldwide: 39

Financial Crisis

• Estimated total amount that world financial institutions will write off by 2010, according to the IMF: $4,100,000,000,000

• Portion of these bad loans and securities that originated in the U.S.:2/3

• Percentage of rich Americans who say they have “lost faith in the integrity of financial service institutions: 64

Bank Failures – The Texas Ratio

• Divide the bank's total nonperforming assets, including loans more than 90 days delinquent, by the sum of the company's tangible equity capital and loan loss reserves. If the number is at or above 1 (or 100%), that bank is at severe risk of failure.

Financial Crisis Inquiry Commission

• Will investigate 20+ specific areas related to the financial crisis• fraud and abuse• state and federal regulatory enforcement• tax treatment of financial products• credit rating agencies• lending practices• Securitization• unregulated financial products• corporate governance• executive compensation.

• The commission will also examine the causes that made major financial institutions fail or likely to fail had they not received exceptional government assistance.

Too Big To Fail

Federal Reserve Becomes the systemic risk regulator for

large and interconnected financial firms Large, interconnected firms as well as

their parents and subsidiaries would be subject to heightened capital, liquidity, and risk management standards. 

The Federal Reserve would also gain the power to supervise systemically important payment, clearing, and settlement systems.

Too Big To Fail

Systemic Risk CouncilFacilitates coordination of policy and resolution of

disputes, and identify emerging risks in firms and market activities.

Chaired by the Secretary of the Treasury and made up of the heads of the principal financial regulators.

Would have the power to gather information from any financial firm in order to identify emerging systemic risks. 

Gives the Dept. of Treasury resolution authority over non-bank financial institutions that pose systemic risk.

Regulatory Consolidation

• Consolidates the Office of the Comptroller of the Currency (“OCC”) and the Office of Thrift Supervision (“OTS”) into a single regulator, the National Bank Supervisor (“NBS”)

• Eliminates the federal thrift charter• Removes obstacles to interstate

branching by national and state banks.

New Consumer Protection Agency

• Would regulate all consumer financial products and services and the institutions that provide them.

• The CFPA would require that disclosure forms are clear and that consumers are offered simple and fair financial products.

• Currently, many consumer regulations are issued jointly by the Federal Reserve, NCUA, FDIC, OCC, OTS and state agencies.

Hedge Funds

• Require advisers to hedge funds and private pools of capital to register with the Securities and Exchange Commission (“SEC”) and impose recordkeeping, disclosure, and reporting requirements on the funds they advise.

Securities

• Keep the Commodity Futures Trading Commission (“CFTC”) and SEC as separate entities, but harmonize the regulation of futures and securities by creating uniform principles of regulation, and subject all over-the-counter (“OTC”) derivatives to comprehensive regulation. 

Securitization Market

• Requires loan originators to retain a five percent interest in the risk of securitized credit exposures, imposing reporting requirements on issuers of asset-backed securities, and reducing regulator reliance on credit rating agencies.

• Strengthens regulation of credit rating agencies

Insurance

• Establish an Office of National Insurance (“ONI”) within the Treasury to gather information and coordinate policy in the insurance sector.

Credit Card Reform