Are G20 Commitments and Dodd-Frank in Sync?

A senior financial economist at the Office of the Comptroller of the Currency has published a paper entitled U.S. Domestic and International Financial Reform Policy: Are G20 Commitments and the Dodd-Frank Act in Sync?. The paper provides a useful overview of the relationship of these two important financial regulatory reform initiatives, focusing in particular on policies to address risks to the financial system posed by systemically important financial institutions (SIFIs).

The paper concludes overall that the SIFI agendas established by the G20 and Dodd-Frank are substantively consistent and complementary. However, they differ in their relative emphasis on the coverage of both banks and nonbanks. The G20 focus is bank-centric compared with Dodd-Frank, which also addresses nonbank financial firms. Second, implementation of Dodd-Frank Act provisions is subject to law requiring public input into the rulemaking process, whereas the G20 process has been less transparent.

Some observations from the paper:

o The hand off of responsibility for responding to the crisis from the G7 to the G20 constituted a major change in how, and by whom, international economic and financial policy coordination is undertaken. This change still appears to be widely under-appreciated.

o Financial Stability Board (FSB) financial system reform policy decisions, while not legally binding, may come to be widely perceived as having the same authority as are Basel Committee capital requirements.

o The FSB aims to influence the development of financial sector regulations with cross-border implications, with a particular focus on SIFIs.

o FSB's agenda conceptually addresses non-banks, but the main focus has been banks. Efforts this year to expand the focus to the insurance sector have been tentative, in part because of the view expressed by insurance regulators in their cross-border forum (the International Association of Insurance Supervisors) that insurance firms pose little systemic risk.

o Both the G20/FSB agenda and Dodd-Frank seek to manage SIFI-generated stability risks by strengthening their ability to absorb shocks and by limiting SIFI activities. The G20/FSB agenda, however, does not yet have a specific workstream for developing limitations on SIFI activities.

o As a result of reforms required by Dodd-Frank, the United States is well-positioned for the G20/FSB peer review of members' SIFI policies scheduled for late 2012.

The paper can be accessed here:

http://www.federalreserve.gov/pubs/ifdp/2011/1024/default.htm

Originally posted by Ted Paradise on the DavisPolk Tokyo Office Blog, on August 8, 2011.

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