Finding a Balance in Regulating Financial Markets

GW Law and Reuters host the heads of the Federal Reserve System and the CFTC in a conversation on financial regulations.

October 5, 2017

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Reuters columnist Gina Chon (l) moderated a conversation with CFTC Chair Christopher Giancarlo (c) and Jerome Powell, governor of the Federal Reserve Board. (William Atkins/GW Today)

By B.L. Wilson

Eliminating or rolling back regulations of financial institutions as President Donald Trump has called for is not the best way to move markets forward, the chair of the Commodities Futures Trading Association (CFTC) said Tuesday at the George Washington University.

“There seems to be an either-or, a black-or-white approach of having only two choices,” CFTC Chair Christopher Giancarolo said. “It’s either we keep everything the way it is, or we roll it back.”

But financial markets are not that simplistic, he said. They constantly evolve and change.

“This argument of rolling back is a false choice,” he said. “The only way forward is to take account of the way markets are changing. . .to make sure regulations are optimized and appropriate for what we’re trying to do and then look forward to the dynamic changes and how to anticipate them.”

Mr. Giancarlo was speaking at a Reuters Summit Conversation on Financial Regulation, which was co-hosted by the GW School of Law. The chair of the CFTC was joined onstage by Jerome Powell, the governor of the Federal Reserve Board. The event at the City View Room was moderated by Gina Chon, a BreakingViews columnist for Reuters.

In welcoming remarks, GW Law Dean Blake Morant said the law school community prides “ourselves in being the focal point of conversation on important issues that govern not only the law but also various political and financial institutions in the country.”

Mr. Powell reminded the audience of GW students and federal workers that financial regulatory agencies have spent the past eight years trying to fix a system that suffered an enormous shock from the 2008 financial crisis.

To avoid a repeat of the damage, regulatory agencies put in place rules for higher capital and liquidity requirements, stress testing for financial institutions and resolutions for very large financial institutions so they won’t have to be bailed out. He said they are now in a process of reviewing what they’ve done for safety, soundness and stability at lower costs to consumers and financial institutions.

“It’s about looking at where we can carry out Congress’ will and preserve the financial stability and safety and soundness but do it more efficiently,” said Mr. Powell.

Both Mr. Giancarlo and Mr. Powell said they support a continued role for the Dodd-Frank Financial Stability Oversight Council (FTOC) that the administration targeted for elimination.

At the top of the Federal Reserve System’s list is tailoring the Volcker Rule under Dodd-Frank that restricts speculative investments by banks and prohibits their involvement in proprietary trading.

Mr. Powell said the range of businesses now covered by that regulation are too broad and needs to be more flexible, perhaps separating commercial banking from investment banking. The stress-testing requirement, on the other hand, has been a new and innovative way of looking at risks that even banks have acknowledged has been beneficial.

In the markets over which CFTC has oversight, Mr. Giancarlo said moving swaps off of bank balance sheets into clearinghouses and requiring the reporting and licensing of swaps has been a good reform under Dodd-Frank. But he said they have created new sets of problems: supersized clearinghouses.

It’s a good idea to look at the reforms like smartphone lines, he said. The first version has features in it that in the next version has either gotten rid of or improved upon.

Cyber threats are the biggest worries for Mr. Giancarlo. “The worst dimension of cyber attacks on our markets and our [financial] systems and our infrastructure, we haven’t seen the worst yet,” he said. “Complacency is unacceptable. “

Mr. Powell is concerned about things that he said are not necessarily under the control of the Federal Reserve Board: stronger employment, higher productivity, balanced regulation.

“The biggest challenge we face as a country is to do what we can to increase the sustainable growth rate of the economy,” Mr. Powell said. “Even another percentage point would make a dramatic difference in people’s lives over time and dramatic differences in political dialogue and so many other dimensions.”