Financial Regulation

Financial Regulation

Research

Hester Peirce | May 01, 2014
American International Group, Inc. (AIG), a large insurance company, received a massive bailout during the financial crisis in response to difficulties centered on the company’s multifaceted exposure to residential mortgage-backed securities. The company is back on its feet, albeit in more streamlined form and with a new overseer—the Federal Reserve. This paper focuses on a piece of the AIG story that is rarely told—the role of the company’s securities-lending program in imperiling the company and some of its insurance subsidiaries. The paper argues that regulatory responses to AIG have been inapt. AIG did not need another regulator, but better risk management. The markets would have conveyed that message clearly had regulators not intervened to ensure AIG’s survival. This paper adds the missing piece to the AIG story in an effort to challenge the notion that more regulatory oversight for companies like AIG will prevent future crises.
Hester Peirce, Robert Greene | Apr 02, 2014
For decades, money market funds (MMFs) were thought to be safe, low-risk investments. The financial crisis of 2007–2009 cast MMFs in a new, less favorable light, which prompted calls for reform. Our paper offers a reform alternative that builds on MMF boards of directors and their well-established responsibility for making key decisions for MMFs. After a brief overview of the regulatory history of MMFs, we describe the responsibilities that boards have under current law, the problems MMFs encountered during the crisis, and market and government responses to these problems. Evidence shows that during the crisis, investors were discerning in deciding whether and when to run; more risky, less liquid funds experienced higher volumes of redemptions. This finding, along with our assessment of funds’ boards of directors’ responsibilities, helps to lay the groundwork for considering the various options for addressing problems still facing MMFs, including our proposal to allow boards to gate their funds when faced by potentially destabilizing redemption pressures.
Todd Zywicki, Robert L. Clarke | Apr 01, 2014
In response to the financial crisis that began in 2008, in 2010 President Obama signed into law the Wall Street Reform and Consumer Protection Act, commonly referred to as the “Dodd-Frank Act." A “centerpiece of the [new law] was the creation of the Consumer Financial Protection Bureau (“CFPB”),” which was established in response to the perception of widespread failures in the federal consumer protection regime with respect to financial products and the belief that these regulatory failures contributed to the financial crisis.
Hester Peirce, Jerry Ellig | Mar 31, 2014
SEC Regulatory Analysis: “A Long Way to Go and a Short Time to Get There”…
Hester Peirce, Ian Robinson, Thomas Stratmann | Feb 27, 2014
This paper presents the results of the Mercatus Center’s Small Bank Survey, which include responses from approximately 200 banks across 41 states with less than $10 billion in assets each, serving mostly rural and small metropolitan markets.
Patrick McLaughlin, Robert Greene | Feb 26, 2014
We apply the methodology of RegData—which quantifies regulations using text analysis of the Code of Federal Regulations (CFR)—to objectively determine the number of new restrictions the Dodd-Frank Act has created and will create. We estimate that Dodd-Frank will increase financial industry regulatory restrictions by 32 percent once all of its rulemakings are finalized, yielding more new restrictions than were created between 1997 and 2010.

Testimony & Comments

Hester Peirce, Vera Soliman | Sep 10, 2014
The Bureau initiated its database without due consideration of the problem the Bureau was trying to solve or the costs and benefits of the database. Rather than expanding the database’s potential to cause unintended harm, the Bureau should return to the drawing board.
Hester Peirce | Jul 10, 2014
As the Federal Reserve celebrates one hundred years, reform efforts are timely. Consideration of fundamental questions about the Federal Reserve’s role in the regulatory landscape and in the markets should accompany those efforts.
Hester Peirce | May 21, 2014
The flaws in the Bureau’s design impair its ability to operate effectively for consumers. Although more fundamental reforms are needed, incremental reforms will help the Bureau to set appropriate priorities and seek relevant comments before acting. Making the agency more accountable, more transparent, and more focused will also make it more effective at ensuring that the financial system is serving the needs of consumers.
Holly A. Bell | Dec 13, 2013
Enabling traders and exchanges to continue to work with regulators in a cooperative environment that recognizes the significant market incentives shared by all stakeholders to ensure trading system and market integrity is the best approach as we transition to technology-based markets.
Hester Peirce | Dec 12, 2013
When the Dodd-Frank Act was being developed, one issue under consideration was whether the Board should lose some of its regulatory powers in view of its poor regulatory performance prior to the crisis. Instead, Dodd-Frank substantially increased the Board’s regulatory powers. One of the most important new powers is the authority to regulate nonbank financial institutions designated systemically important by the Financial Stability Oversight Council. So far, General Electric Capital Corporation, American International Group, and Prudential have been so designated, with additional entities likely to follow. These financial institutions will present the bank-focused Board with new regulatory challenges. It is important that the Board respond with well-vetted, tailored regulations that recognize that these entities are not banks and cannot be effectively regulated as if they were.
Hester Peirce | Dec 03, 2013
Chairman Schweikert, Ranking Member Clarke, and members of the Subcommittee, thank you for the opportunity to be part of today’s hearing on regulatory burdens on small financial institutions. In financial services, as in every other sector, the United States is not a one-size-fits-all nation. Financial institutions of all different sizes coexist, and customers choose among them based upon their needs. A regulatory environment that is increasingly unwelcoming to small financial institutions may curtail customer choice.

Speeches & Presentations

Expert Commentary

Oct 22, 2014

Mr. Dudley is correct that "a good culture cannot simply be mandated by regulation or imposed by supervision." A bad culture, however, can be cultivated by regulators that micromanage firms and offer banks cover when they make mistakes.
Oct 16, 2014

Going back to the New York Fed’s tapes, it is fair to ask what the point of a complex and burdensome regulatory system is if the rules are so easily ignored by the companies they are supposed to constrain. Isn’t the main reason behind these rules that taxpayers’ money is on the line—since the government has granted an implicit promise to bail out big companies in distress?
Oct 15, 2014

Last week, the Securities and Exchange Commission's (SEC) Investor Advisory Committee — on which I currently serve — recommended, over my objection, that the SEC change the way it assesses who qualifies as an "accredited investor." Although sensibly challenging the existing approach to accreditation, the committee's approach was too conservative. Instead, the committee should have called for a more fundamental reconsideration of whether existing investment restrictions are consistent with investor protection.
Sep 30, 2014

Four decades after Hayek received the Nobel Prize, there are many corners of the world that have yet to absorb his message of humility. To change that, financial regulators and their legislative benefactors should commemorate this two-score anniversary milestone by revisiting Hayek's pioneering work.
Sep 24, 2014

The court's ruling just encourages the CFTC to continue using statements that don't bind itself to bind the industry. Likewise, the court encourages the agency to continue treating cost-benefit analysis as a fill-in-the-blank exercise rather than a rigorous examination. That is hardly a model of good government. In its policymaking endeavors, the newly reconstituted CFTC should voluntarily embrace strong rulemaking procedures, instead of the court's form-over-substance alternative.
Sep 22, 2014

Earlier this summer, Treasury released the final version of its regulation carving out an exception for longevity insurance from the minimum distribution requirements applying to defined contribution accounts and IRAs. Minimum required distributions (MRDs), established by code section 401(a)(9), are a long-standing feature of the retirement regulatory regime. The intent behind MRDs is that tax-favored retirement assets, through timely distributions and thereby taxed as income, will be used for their primary purpose — to support spending in retirement.

Charts

This chart depicts two data series from RegData 2.0—word counts and restriction counts. Each series contains aggregated statistics for all federal regulatory agencies that were required to engage in rulemaking by the Dodd-Frank Act of 2010.

Experts

Garett Jones is a senior scholar and BB&T Professor for the Study of Capitalism at the Mercatus Center and an associate professor of economics at George Mason University. He specializes in macroeconomics, monetary economics, and the microfoundations of economic growth.
Arnold Kling is a Mercatus Center–affiliated senior scholar at George Mason University and a member of the Financial Markets Working Group. He specializes in housing-finance policy, financial institutions, macroeconomics, and the inside workings of America’s federal financial institutions. He also is an adjunct scholar at the Cato Institute in Washington, DC.
Hester Peirce is a senior research fellow at the Mercatus Center at George Mason University. Her primary research interests relate to the regulation of the financial markets.
J.W. Verret is a senior scholar at the Mercatus Center at George Mason University on leave to serve as chief economist at HFSC.
Lawrence H. White is a professor of economics at George Mason University. His primary research interests include monetary theory and policy, history of banking and financial institutions, and central banking.

Podcasts

Hester Peirce | August 22, 2013
Hester Peirce discusses the Push to Implement Dodd-Frank on Eye on Your Money

Upcoming Events

Recent Events

Join the Cato Institute and the Mercatus Center at George Mason University for a two-day conference July 16 and 17 exploring policies to improve financial markets in a post-Dodd-Frank world.

Books

Media Clippings

Hester Peirce | Feb 12, 2014
Hester Peirce quoted at Reuters.
Patrick McLaughlin | Jul 22, 2013
The researchers examined data from the Code of Federal Regulations and determined that over 7,000 new financial rules were implemented between 1999 and 2008, bringing the total number of regulations to 47,494 just before the crash.
Veronique de Rugy | Jun 20, 2013
Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, said the public tends to overlook the fact that the SBA is largely irrelevant in the overall small business lending market.
Keith Hall | Jun 09, 2013
Giving hundreds of government employees advance notice of a policy decision “is way too many,” said Hall, now a senior fellow at George Mason University’s Mercatus Center. “I’ve done my share of working on policy issues and policy decisions, and you just don’t spread that stuff around like that.”…
Keith Hall | Jun 07, 2013
Temporary workers typically serve as a bellwether for the labor market, he says in a telephone interview. They're the first to get dumped when business starts to go bad…
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