FDIC Chair Martin J. Gruenberg warned against making significant changes to Dodd-Frank reforms and discussed the benefits of post-crisis regulation.

In remarks at the Brookings Institute in Washington, D.C., Chair Gruenberg outlined the extensive post-crisis reforms instituted by banking regulators to address, among other issues, risk-based and leverage capital, liquidity, proprietary trading, margin for non-cleared swaps, and the regulation of systemically important financial institutions ("SIFIs"). He asserted that these reforms address the significant risks (such as excessive use of leverage, inadequate liquidity, and the securitization of large amounts of poorly underwritten mortgages backed by an "opaque network of credit derivatives") that weren't accounted for prior to the crisis.

Chair Gruenberg also touched on the benefits of resolution planning, the creation of the Orderly Liquidation Authority, and the Federal Reserve Total Loss-Absorbing Capacity rule. He stated that each is an essential element of a stable prudential framework. He asserted that the efficacy of Dodd‑Frank wouldn't be determined until the economy is stressed.

With regard to post-crisis performance, Chair Gruenberg emphasized that the core reforms have been successful, as demonstrated by improved earnings growth, annualized loan growth, and corporate bond issuance, among other positive indicators. Chair Gruenberg identified certain areas as targets for regulatory review and reform, such as simplifying certain Volcker Rule requirements, but cautioned against sweeping changes, arguing that such changes could ultimately result in the "substantial weakening of requirements," which may increase the possibility of another financial crisis. Chair Gruenberg expressed confidence that the resolution framework is significantly stronger than it was before the financial crisis.

Commentary / Steven Lofchie

According to FDIC Chair Gruenberg, "[t]he fact that the credit rating agencies have lowered the credit ratings of the eight U.S. globally systemic banking organizations (G-SIBs) because of a reduced expectation of taxpayer support in the event of failure is a sign of progress." Suppose, instead, that the rating agencies had raised the credit rating of large U.S. banks. What conclusion should be drawn? The reality is that it is impossible to demonstrate with mathematical certainty either the success or failure of Dodd-Frank. One could reasonably argue, perhaps even using some of the facts touted by the Chair, that lowered credit ratings do not demonstrate success. It is time to revisit Dodd-Frank.

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