In a recent speech —delivered in London to a joint meeting of the Financial Markets Law Committee, the Financial Markets Lawyers Group, the Financial Law Board, and the European Financial Markets Legal Group—Commissioner Michael Piwowar of the Securities and Exchange Commission outlined his thoughts on improving bank regulation and suggested a variety of disclosure options that should be explored.
The commentary touched upon a recurring concern Piwowar has expressed in the past: that prudential (bank) regulators are trespassing into the SEC’s domain. “There is often jurisdictional tension between banking regulators and markets regulators,” he said.
Piwowar expressed his “opposition to calls by some prudential regulators for so-called ‘prudential market regulation’ of capital markets actors,” offering a suggestion that the SEC and prudential regulators work together on an alternative he described as “market-based prudential regulation.”
Some prudential regulators have stated that there is a “need to broaden the perimeter of prudential regulation, both to certain nonbank financial institutions and to certain activities by all financial actors” and that “any firm whose failure could pose systemic risk is subject to prudential regulation, quite apart from its relationship with [insured depository institutions],” he said. “These regulators made it clear that they were focused not only on large banking organizations with extensive operations but also ‘other large and complex financial firms.”
At the top of these regulators’ list of shadow banking activities requiring so-called macroprudential regulation are asset management activities.
“If we were to apply macroprudential regulation to capital markets and, in particular to the asset management industry, as many prudential regulators are calling for, the results could be catastrophic,” Piwowar said. Trying to mitigate risks related to the asset management industry on a macro level “likely would result in a narrowing of the differences in the way assets are managed, which could result in all financial firms having similar investments.”
“If all firms are invested in the same types of assets, then during a period of market stress asset management firms are more likely to collapse,” he added. “Add this to the risk posed by already highly correlated bank balance sheets and you have a recipe for the collapse of the entire financial system.”
Piwowar’s proposal is that, rather than imposing prudential regulation on markets, requiring banks to comply with the disclosure-oriented focus of market-based regulation would provide better protection to the financial system.
His plan includes “five areas that are ripe for improved disclosure,” among them: bank investment portfolios; the impact from the comprehensive capital analysis and review (CCAR) process; the resolution plans, or living wills, imposed by recent banking regulations; material regulatory costs; and better information about bank loan portfolios.
Requiring banks to provide this information “would likely reduce the fear that many investors and regulators, including me, have about the opaqueness of a bank’s financial health” and “go a long way in aiding the Commission’s and banking regulators’ ability to oversee and monitor banks while providing investors with confidence that the markets are able to reliably judge a bank’s financial health,” he said.