Department of Economics
Boston College
EC 202.05
Macroeconomic Theory
Supplement 19
Professor Sanjay Chugh
The attached New York Times article from December 5, 2013 describes Treasury
Secretary Jacob Lew’s remarks that will be delivered today that financial regulation has
been and will continue to strengthen. Lew’s statement comes as regulators next week
will finally meet to approve the “Volcker Rule,” which is a key component of the recent
attempts at increasing regulations. The basic idea of the Volcker Rule is to prevent banks
from investing in various assets for the banks’ own profits in a way that might hurt their
customers. For more on the Volcker Rule, see the wiki page:
http://en.wikipedia.org/wiki/Volcker_Rule
You should be able to see that tighter financial regulations implies a smaller value of
the broad notion of the “leverage ratio” R in our financial accelerator framework.
Macroeconomic Theory | © Sanjay K. Chugh
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NEW YORK TIMES
DECEMBER 5, 2013, 12:02 AM
Treasury Chief to Declare Big Gains in
Financial Reform
By PETER EAVIS
Treasury Secretary Jacob J. Lew will assert on Thursday that the Obama
administration’s vast overhaul of the financial system is close to
accomplishing its goal of shielding society from the dangers posed by
giant banks.
In a broad policy speech intended to signal the administration’s views
on financial regulations, Mr. Lew will also make it clear that more
measures may be needed to strengthen the global system. In comments
that will most likely upset foreign governments, he will call on overseas
regulators to make their rules tougher.
“We will press other jurisdictions to match our robust standards —
including in Europe and across Asia,” Mr. Lew will say, according to a
draft of the speech, which he is scheduled to give at the Pew Charitable
Trusts office in Washington.
More than three years after the overhaul began, Mr. Lew says that the
largest banks are safer today, making it much less likely that taxpayers
would have to bail them out in a future crisis.
“Earlier this year, I said if we could not with a straight face say we ended
‘too big to fail,’ we would have to look at other options,” he says. “Based
on the totality of reforms we are putting in place, I believe we will meet
that test, but to be clear, there is no precise point at which you can prove
with certainty that we have done enough.”
Mr. Lew’s comments come as regulators are scheduled to meet next
week to finally approve the Volcker Rule, a cornerstone of the overhaul
that tries to stop banks from speculatively trading with depositors’
money and other funds. In recent months, the Treasury Department has
pressed the five agencies that worked on the rule to finish it before the
end of the year.
Macroeconomic Theory | © Sanjay K. Chugh
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The Treasury secretary’s comments are likely to add more fuel to the
debate over the adequacy of the rules that stem from the Dodd-Frank
Act, which Congress passed in 2010.
Critics of the legislation say it does not solve the too-big-to-fail problem,
because, they say, it does not directly limit or reduce the size of the
nation’s largest lenders. To make up for this perceived shortcoming,
some Republican and Democratic senators this year introduced two
pieces of legislation that they said would be much more likely to
constrain the biggest banks.
Against this background, Mr. Lew’s speech gives firm backing to the
policies that stem from Dodd-Frank, but it also says officials have to
remain vigilant to make sure that the rules work effectively. Additional
actions may also be necessary, he says. “If, in the future, we need to take
further action, we will not hesitate,” he says in the draft of the speech.
Mr. Lew is pushing for new measures to reduce the risks posed by
money-market mutual funds. In addition, he argues that vulnerabilities
still exist in the short-term debt markets that Wall Street firms tap
heavily. The Federal Reserve is expected to propose new measures soon
to make these short-term markets more stable. The speech also calls on
Congress to provide all regulatory agencies with enough money to
enforce the new rules.
Much of the speech, however, was devoted to the progress of financial
regulations overseas. Next year, the Treasury expects to focus on
working with foreign regulators to devise plans for winding down a large
global bank in an orderly way if it gets into trouble.
“The failure to work out such arrangements now could pose a significant
future risk to our financial system,” Mr. Lew’s speech will say.
The Treasury Department also remains concerned about regulatory
loopholes in overseas derivatives markets.
Federal regulators, seeking to rein in risky derivatives trading at big
banks overseas, have landed in a turf battle with foreign finance
ministers who are vying to limit the reach of American authorities. A
deal was struck in July for a joint approach to cross-border trades. But
on Wednesday, in a move that underscored the continuing challenge of
carrying out Dodd-Frank, Wall Street trade groups filed a lawsuit that
Macroeconomic Theory | © Sanjay K. Chugh
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challenged cross-border guidelines that American regulators had put in
place. Mr. Lew’s comments also suggested that the Treasury believes
that foreign governments may use trade negotiations as a way to weaken
financial regulations. “We will not allow these agreements to serve as an
opportunity to water down domestic financial regulatory standards,” he
says.
In reality, much still needs to be done in the United States. Although the
Volcker Rule may be soon be finished, several complex and far-reaching
requirements that arose from Dodd-Frank still have not been
completed. These include crucial rules on derivatives and mortgage
lending.
Mr. Lew said very little about efforts to overhaul housing finance in the
United States. The taxpayer still backstops nearly every new mortgage,
and the Obama administration has taken few steps to move home loans
back into the private sector.
“Significant housing finance reform is still needed to add clarity to the
market and attract more private capital,” Mr. Lew says.
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