President Obama’s recent appointment of Jack Lew to head the U.S. Treasury could signal that the administration is stepping away from financial reform.
The contentious Volcker Rule ban on proprietary trading, which is set to be finalized by March, was intended to prevent the expansive growth of banks through private equity and hedge fund investment, though the activities were not the core cause of the crisis.
Many financial institutions have already started to sell off proprietary trading units, commodities divisions and hedge funds in anticipation of the rule, yet rules pertaining to the responsibilities and roles of the Financial Stability Oversight Council have not been finalized. Though Dodd-Frank was designed to reduce systemic risk, some rules could just be transferring risk away from banks.
Under Dodd-Frank, the FSOC is authorized to designate what banks are “systemically important,” in which the size, interconnectedness or nature of an institution could pose a threat to U.S. financial stability, and which institutions will be subject to supervision by the Federal Reserve Board of Governors.
In order to designate an entity as a systemic risk, two-thirds of the FSOC’s members must approve. The council, led by the Fed, would be required to establish liquidity and capital requirements. If an entity cannot meet the requirements, the council would oversee its orderly dissolution. Jack Lew is set to take over as head of the FSOC, and many market participants expect him to turn away from financial reform as a priority in favor of the debt ceiling.
Additionally, the Basel Committee on Banking Supervision released a final rule on the Liquidity Coverage Ratio, which has been watered down from the version originally proposed in 2009. After regulators release their rule proposal on liquidity, lobbying by U.S. firms could further limit the rule.
In 2013, the Basel Committee will move to finalize the Net Stable Funding Ratio, the second part of the liquidity standard designed to ensure that banks better manage their assets in the long term. As with the LCR, the rule could ultimately more lax than originally intended. The Basel Committee will also move to finalize the Significant Financial Institution buffer, which was postponed in 2010.