Global Financial Regulation

Panel Consensus on "Too Big to Fail":

• The panel largely agreed that "big" itself is not the root cause of financial instability; rather, excessive risk, leverage, and regulatory failures were the primary drivers of the crisis.
• Senator Bob Corker (R-TN) argued the primary concern is whether large institutions receive an implicit government subsidy, advocating for a GAO study rather than immediate breakup.
• James Barth (Milken Institute) and Gary Lathrop (Citi) stated that breaking up banks into smaller entities would not eliminate banking problems and noted U.S. banks are small relative to GDP compared to global peers.
• Tom Pirelli (Jenner & Block) emphasized that regulatory opacity and interconnection, rather than sheer size, pose the greatest enforcement and systemic risks.

Competitive Dynamics and Regulatory Structure:

• Kevin Lynch (BMO) noted that Canadian universal banks have functioned well without breakup, attributing success to single federal regulators and consolidated leverage rules rather than size.
• Lathrop argued that size provides necessary scale to service multinational clients, suggesting that breaking a $2 trillion bank into ten smaller entities would likely result in similar risk profiles due to uniform capital requirements.
• The panel highlighted a trend toward regulatory fragmentation, noting that differing approaches like the U.S. Volcker Rule, the U.K. Vickers Plan, and the German Lilienfeld Plan create a complex global environment rather than harmonizing rules.

Capital Requirements (Basel III) and Economic Impact:

• Panelists warned that raising capital requirements too high (e.g., to 25-30%) would drastically increase the cost of credit and reduce availability, potentially stifling economic growth.
• Barth identified a specific risk: if capital rules become too onerous for banks, activity may shift to the less-regulated "shadow banking" sector, which currently holds an estimated $70 trillion globally.
• Corker criticized the Basel III zero-risk weighting on OECD sovereign debt as a "joke" and argued the rules should not apply to community banks.
• Lynch and Lathrop emphasized the need for a balance between capital buffers and the ability to lend to small and medium-sized enterprises (SMEs).

Resolution Regimes and "Orderly Liquidation":

• The panel discussed the FDIC's "single point of entry" resolution strategy, with Corker expressing concern that creditors might only lend to subsidiaries if the holding company structure is not sufficiently capitalized to absorb losses.
• Corker suggested Title 11 bankruptcy might be more judicious than Title II for individual failures but acknowledged Title II is necessary for systemic crises, provided the holding company has enough long-term debt to be wiped out.
• Lathrop noted the difficulty of resolving massive institutions without a "daisy chain" effect that drags down the broader economy.

Shadow Banking and Non-Bank Financial Players:

• The panel identified a migration of lending activity from regulated banks to shadow banks and corporate balance sheets (e.g., middle-market lending) as a direct response to stricter Basel III capital rules.
• Corker and Barth called for a shift from regulating institutions to regulating specific activities to prevent risk from simply moving into the unregulated shadow sector.
• Lathrop noted that while hedge funds and private equity are gaining share, many clients are now assuming the risk themselves rather than paying banks for it.

Sovereign Debt and Global Regulatory Coordination:

• Concerns were raised regarding the "mutuality of risk" between banks and governments, where banks hold sovereign debt treated as zero-risk, creating vulnerabilities during sovereign debt crises (e.g., Cyprus, Eurozone).
• Bart highlighted a trend of "balkanization," where regulators like China now require foreign bank subsidiaries to be separately capitalized to protect domestic depositors.
• Lynch warned that divergent regulatory interpretations between the U.S. and EU regarding derivatives clearing could lead to two parallel, inefficient systems.

Financial Transaction Tax (FTT) and Legislative Trends:

• The panel unanimously rejected the financial transaction tax (FTT); Corker stated it has "no legs" in Congress, while Lathrop and Pirelli argued it would severely impact market liquidity and hurt job growth.
• Lathrop noted that FTTs and other austerity measures effectively "squeeze the growth balloon," potentially leading to a binary outcome where only large, liquid assets can be traded.
• Corker confirmed that political sentiment in Congress strongly favors community banks over large institutions, with no momentum for arbitrary size caps or transaction taxes.

Specific Legislative and Innovation Issues:

• A proposal to lift the moratorium on Industrial Loan Corporations (ILCs) owned by non-financial firms (e.g., Walmart, Harley-Davidson) was raised, with Barth noting that nine existing ILCs have never failed and could help recapitalize the system.
• Lynch and Corker expressed support for opening the banking sector to more non-financial firms and new banking models (e.g., "Google Bank") to foster innovation.
• Barth criticized the Federal Reserve and other regulators for a "miserable job" of enforcement prior to the crisis, arguing regulatory accountability is just as critical as bank regulation.