Commissioner Piwowar Criticizes FRB's Overreach (with Lofchie Comment)
Speaking before the Exchequer Club of Washington, D.C., Commissioner Michael S. Piwowar of the SEC criticized the Board of Governors of the Federal Reserve System (the "FRB") for its efforts to apply prudential regulation to "shadow banks" operating in the capital markets.
Commissioner Piwowar stated that in seeking to impose "prudential market regulation" on non-banks operating in the capital markets, the FRB has ignored the fact that such firms - including asset management and investment companies - are already subject to extensive regulation by the SEC. Commissioner Piwowar argued that although the SEC's disclosure-based approach to regulation is appropriate for the capital markets, applying the FRB's prudential-based approach to capital market firms could lead to reduced economic growth.
Going a step further, Commissioner Piwowar argued that banks and bank holding companies should be subject to heightened disclosure requirements regarding their investments. Commissioner Piwowar said that he "would never be so bold as to call banks 'shadow investment companies'" but suggested that while disclosure-based reforms would improve financial stability in the banking sector, prudential reforms in the capital markets would damage the economy.
Lofchie Comment: It is time to re-examine the role that the bank regulators play in overseeing certain financial institutions. Dodd-Frank and related rulemakings significantly expand the reach of the bank regulators. The regulators are playing a much greater role in the supervision of broker-dealers and the capital markets. Philosophically, this increase in regulatory authority has not been given the consideration it requires. Rather than adjusting their intellectual tools to the demands of the capital and investment markets, the bank regulators seem to be of the view that participants in these markets should act as if they were banks. But participants in the capital markets should have the right to take risks, and even to lose money. The regulators should not apply the same philosophy to the supervision of a local savings and loan that takes insured deposits as they do to the supervision of a private fund were the investors know that their money is at risk.