Global Banking Regulation

Date & Time: Tuesday, May 01, 2012; 04:00 PM - 05:15 PM

Moderator:James Barth, Senior Finance Fellow, Milken Institute; Lowder Eminent Scholar in Finance, Auburn

University

Speakers:Madelyn Antoncic Vice President and Treasurer The World Bank GroupMadelyn Antoncic, Vice President and Treasurer, The World Bank Group

Chris Brummer, Senior Fellow, Milken Institute; Professor of Law, Georgetown University Law Center

Mary Ellen Iskenderian, President and CEO, Women's World Banking

Bo Lundgren, Director General, Swedish National Debt Office

Michael Taylor, Member of the Secretariat, Financial Stability Board, Bank of International Settlements

History of banking crises worldwideMore frequent (and more severe)More frequent (and more severe)

Middle East & North Africa

Sub-SaharanSub-Saharan Africa

South Asia

East Asia & Pacific

Latin America &Latin America & CaribbeanEurope &

Central AsiaNorth America

Sources: Reinhart and Rogoff (2008), Milken Institute.

1801 1816 1831 1846 1861 1876 1891 1906 1921 1936 1951 1966 1981 1996 2011

New EU regulatory structure

European Central Bank Council (ECB President, and Vice-President and

NCBs Governors)

Chairpersons of EBA, EIOPA and

ESMA

A member of the European

Commissionropr

uden

tial

uper

visi

on

General Board

Euro

pean

stem

ic R

isk

oard

(ESR

B)

NCBs Governors)

urop

ean

perv

isor

y th

oriti

es

Joint Committee of the ESAs

Mac su

ial

Microprudential Information Exchange Systemic risk

ESy

sB

o

Eu

Sup

Aut

atio

nal

perv

isor

y th

oriti

es

European Banking Authority (EBA)

European Insurance and Occupational Pensions

Authority (EIOPA)

European Securities and Markets

Authority (ESMA)

National Banking National Insurance National Securities

Mic

ropr

uden

tisu

perv

isio

n

Na

Sup Au

t National Banking Supervisors

National Insurance Supervisors

National Securities Supervisors

Source: Xavier Vives (2012).

G20 regulatory reform agendaKey elements and statusKey elements and status

Agreed (international guidelines)or accomplished (national implementation)Work in progressInsufficient processNothing available to implement

Internationalguidelines

Nationalguidelines

Bank capital and liquidity

SIFI framework

Shadow banking

OTC derivatives

Credit ratings

Notes: OTC = over-the-counter; SIFI = systemically important financial institutions.Source: International Monetary Fund.

Data initiatives

Financial Stability Board

• The FSB coordinates the work of national financial authorities and international standard setting bodies to develop and promote financial stability.

• It brings together national authorities responsible for financial g gstability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank

texperts.

Financial Stability Board

• Not a “global financial regulator”• Guiding hand in standard setting processGuiding hand in standard setting process• Co-ordination on implementation of international standards• Co-ordination on supervision of cross-border groups• Assessment of cross-border vulnerabilities• Assessment of cross-border vulnerabilities

Concentration of banking assets worldwide

“[T]he G20 must put in place a credible regime for managing 68%

50 biggest

Percent of banking assets worldwide

g g gthe orderly failure of financial institutions,however large, complex or international ”

44%

68%

10

20 biggest banks

ggbanks

international.”

Paul TuckerDeputy Governor of

the Bank of England and a member of Financial

14%

26%

5 biggest b k

10 biggest banks

Note: $96.5 trillion in assets in 2011.Sources: The Banker, Milken Institute.

a member of Financial Stability Board

Financial TimesJanuary 31, 2012

banks

Fifty biggest banks in the world get bigger

“[T]he G20 must put in place a credible regime for managing 100

Combined assets of the world's 50 biggest banksPercentof GDP

g g gthe orderly failure of financial institutions,however large, complex or international ”

66%

94%

60

80

international.”

Paul TuckerDeputy Governor of

the Bank of England and a member of Financial15%

24%

45%

20

40

Sources: The Banker, Milken Institute.

a member of Financial Stability Board

Financial TimesJanuary 31, 2012

15%0

1970 1980 1990 2000 2011

Cross-border banking for selected big banks

80

100Domestic assets Foreign assetsPercent of total banking assets

20

40

60

0

20

Note: Data as of 2010.Source: Bloomberg.

History of U.S. banking laws More regulators and more regulations after every crisisMore regulators and more regulations after every crisis

Federal Housing Finance

Regulatory Reform Act

(2008)

Federal Reserve Act

(1913)(Bank runs)

Depository Institutions

Deregulation and Monetary

Control Act

Financial Institutions Reform,

Recovery and Enforcement Act

(1989) (S&L i i )

2010

(2008)

1860

1880 1900 1920 1940 1960

1980 2000

(Bank runs) Control Act (1980)

(S&L crisis)

N ti l

(S&L crisis)Dodd–Frank Wall Street

Reform and Consumer Protection

Act

National Currency Act

Federal Deposit

Insurance Corporation

Improvement

National Bank Act

(1864)Garn- St Germain

Depository Institutions Act

(1982)(S&L crisis)

Federal Deposit

Insurance Corp. & SEC

(Great

(Civil War & wildcat

b ki )

SarbanesOxley Act

(2002)(Enron and

Emergency Economic

StabilizationAct

(2008)

(2010)

Source: Milken Institute.

(1863)Improvement

Act (1991)

(Banking crisis)

(Great Depression)

banking) (Enron and WorldCom

bankruptcies)

New U.S. regulatory structure

• Federal Reserve

Nonbank financial and bank holding companies posing

systemic risk

• Federal Housing Finance Agency

Fannie Mae, Freddie Mac, and Federal

Home Loan Banks

• Consumer Financial Protection Bureau

• Financial Stability Oversight Council (Treasury, Fed, OCC, CFPB, SEC, CFTC, FDIC, FHFA, NCUA, OFR, FIO and three

Identify emerging systemic risks and

improve interagency cooperation

Protect consumers across the financial sector from

unfair, deceptive, and abusive practices

• National Credit Union Administration• State credit union regulators

Credit Unions

National commercial banks and federal

savings banks

State commercial and savings

banks

Hedge funds, private equity

funds and venture capital funds

Insurance companies

Securities brokers/dealers

Other financial companies, including mortgage companies

and brokers

Fed is the regulator when subsidiaries include a commercial or savings bank

• OCC • State bank • SEC • FINRA • FedPrimary/ • 50 State insurance

state regulators)

• FDICState baregulators

• FDIC• Fed--state membercommercial banks

• SEC • CFTC• State securities regulators

ed• State licensing(if needed)

• U.S. Treasuryfor some products

Foreignbranch

Foreignbranch

ysecondaryfunctionalregulator

Justice Department Federal courts

50 State su a ceregulators plusDistrict of

Columbiaand Puerto Rico

• FIO(oversight)

• OCC• Host country regulator

• Fed• Host country regulator

p• Assesses effects of mergers and acquisitions on competition

• Ultimate decider of banking, securities, and insurance products

Source: Milken Institute.

What will be the impact of theU S Dodd-Frank Act?

“Has anyone bothered to study the cumulative effect of these”

“The central bank doesn’t have the quantitative tools to study

U.S. Dodd-Frank Act?

regulatory and market fixes?

Jamie DimonJPM Ch CEO

the net impact of all the regulatory and market changes over the last three years... It’s too complicated” to st d theJPMorgan Chase CEO

June 7, 2011too complicated” to study the new regulations’ affects.

Ben BernankeFed Chairman

June 7, 2011

What will be the impact of tougher regulators?

“It is…possible that bank regulators, in an effort to bolster their reputation for toughness and prevent what they seetheir reputation for toughness and prevent what they see as “systemic risk,” will act to suppress risk-taking in general, limiting innovation and dynamism in the economy.”economy.

Richard Fisher and Harvey RosenblumFRB of DallasFRB of Dallas

Wall Street JournalApril 4, 2012

Concentration of U.S. banking assets

“We can select the road to enhanced financial efficiency 89%

50 biggest

Percent of bank holding companies assets

yby breaking up TBTF banks…. Or…we almost certainly will face the prospect of again using taxpayer

79%

10

20 biggest BHCs

ggBHCs

again using taxpayer funds to rescue bigbanks.”

Richard Fisher and H R bl

52%

67%

5 biggest BHC

10 biggest BHCs

Note: $16.5 trillion in assets in 2011.Sources: The Banker, Milken Institute.

Harvey RosenblumFRB of Dallas

Wall Street JournalApril 4, 2012

BHCs

Fifty biggest U.S. banks get bigger

“We can select the road to enhanced financial efficiency

98%100

Combined assets of the 50 biggest bank holding companiesPercentof GDP

yby breaking up TBTF banks…. Or…we almost certainly will face the prospect of again using taxpayer

98%

60

80

again using taxpayer funds to rescue bigbanks.”

Richard Fisher and H R bl

25%33% 33%

49%

20

40

Sources: The Banker, Milken Institute.

Harvey RosenblumFRB of Dallas

Wall Street JournalApril 4, 2012

01970 1980 1990 2000 2011

U.S. Senators Brown and Kaufman amendment on Too Big To FailLi it d it li biliti t 2% f GDPLimits non-deposit liabilities to 2% of GDP

Bank holding Total assets Total assets Non-deposit liabilities

Non-deposit liabilities

Non-deposit liabilities exceeding

Impact on 5 biggest banks

company (US$ bn) (% of GDP) liabilities(US$ bn)

liabilities(% of GDP)

liabilities exceeding 2% of GDP (US$ bn)

JPMorgan Chase 2,266 14.8 1,138 7.4 819

Bank of America 2,129 13.9 1,103 7.2 785America , ,

Citigroup 1,874 12.2 1,005 6.6 688

Wells Fargo 1,314 8.6 393 2.6 86

G ldGoldman Sachs Group 924 6.0 878 5.7 563

Note: Data as of December 31, 2011.Sources: Bloomberg, Milken Institute.

Shadow banking grows in importanceRepresents 20-30% of the world financial sectorRepresents 20-30% of the world financial sector

Share of U.S. financial assets by type of financial institution

1945 2011

“Regulation has done some good, but more

1945 Total: $0.2 trillion

Contractualintermediaries

2011 Total: $62.7 trillion

Contractualintermediaries

Depositoryinstitutions

work needs to be done to prevent shadow credit intermediation from continuing to be a source intermediaries

24% Depositoryinstitutions

70%Shadowbanking

institutions6%

intermediaries28%

institutions28%

Shadowbanking

institutions44%

of systemic concern.”

Tobias Adrian and Adam AshcraftFRB of New York

Sources: Federal Reserve Board, Financial Times, Milken Institute.

44%April 2011

U.S. small businesses account for 61% of private sector job growth in past 15 yearsprivate sector job growth in past 15 years

Total net job gains: 9.2 million1996 - 2011Q2

Medium/large size business

39%Small

business61%

Note: Small business < 500 employees.Sources: US Bureau of Labor Statistics, Milken Institute.

Small businesses raise only 22% of their capital from bankstheir capital from banks

SBA l

Percent of survey respondentsJuly 2011

36% of small-business owners feel they are NOTable to obtain

Bank loans22%

N fi i

SBA loans2% Others

9%Private loans10%

able to obtain adequate financing.

Credit cards17%

No financing10% Business

earnings19%Vendor

credit11%

Source: National Small Business Association.

17%

Large banks overtake smaller banksShare of assets of all U S depository institutionsShare of assets of all U.S. depository institutions

“Less lending among smaller banks signals 80

90Percent of total banking assets

Large bankscontinued tough times for small businesses, typically an important contributor to 40

50

60

70Large banks

economic growth.”

David ReillyWall Street Journal10

20

30

40

Smaller banks

Note: Large banks are banks with assets > $10 billion.Source: Federal Deposit Insurance Corporation.

February 14, 201201985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Mobile banking vs. “old-school” banking to provide financial services to the poorprovide financial services to the poor

“[T]he poor are stuck using cash…. [It] has never been profitable to put bank branches in the slums and rural villages where poor people live.… Mobile technology is a solution for the roughly one billion people who already have a phone but who don’t have a bank account…. [T]he World Bank and the Gates Foundation are already investing heavily in these new technologies for providing the poor with financial services.”

David WolmanWall Street Journal

February 11-12, 2012y ,

Small and medium enterprises loan shareof total business loansof total business loans

“SME loan shares … [are] well below the

3540

Percent of total business loans

[are] well below the respective contribution by SMEs to national income and 15

202530

employment.”

OECD20120

510

Note: Data as of 2010.Source: OECD.