Letter Regarding Systemic Risk

March 3, 2010

The Honorable Christopher Dodd

Chairman

Committee on Banking, Housing and
Urban Affairs

United States Senate
Washington, DC 20510

The Honorable Richard Shelby
Ranking Member
Committee on Banking, Housing and Urban Affairs
United States Senate
Washington, DC 20510

Dear Chairman Dodd and Ranking Member Shelby:

The U.S. Chamber of Commerce, the world's largest business federation, representing the interests of more than three million business and organizations of every size, sector, and region, has long called for legislation to modernize America's financial services regulatory framework. Given the massive failures in markets and the regulatory framework, Congress and the Administration are right to examine how to ensure regulators and markets have the information and tools they need to monitor systemic risk. However, the Committee should consider several important issues as the process of crafting financial regulatory reform continues.

In particular, the Chamber has called for greater coordination among regulators, mechanisms to ensure regulators have the information needed to identify systemic risks, and predictable and transparent rules to facilitate the orderly dissolution of failing financial institutions.

The Chamber believes these goals can and must be achieved without the creation of a new systemic risk regulator that either duplicates existing regulation or permanently designates, formally or informally, specific financial institutions as systemically significant, thereby designating them "too big to fail." The Chamber also believes Congress should avoid creating mechanisms for sustained, open-ended government intervention in the financial services industry. In modernizing this regulatory framework, Congress must ensure that regulation enables well-functioning, transparent, and liquid markets, so that market discipline, and not Washington, can effectively serve as the primary arbiter of value and risk in the U.S. economy.

I. Systemic Risk Council, Duplicative Regulation and "Too Big to Fail"

The Chamber supports the formation of a Council, made up of the Treasury Department, the Federal Reserve, and the functional regulators, to monitor systemic risk. Greater access to comprehensive market and industry information would assist the Council in identifying emerging threats to America's financial stability. The Chamber also believes that functional regulators, rather than the Federal Reserve, should play the predominant role in ensuring greater oversight over the activities of large, non-bank financial institutions.

A "one size fits all" approach will not produce more effective oversight. In this regard, the Chamber opposes bank-like regulation for large, non-bank institutions. Shoehorning nonbank institutions into a banking regulatory framework would disrupt how these institutions compete in and out of their industry. Instead, an institution's functional regulator should have authority to set heightened standards that provide appropriate safeguards yet support the various business models of non-bank institutions.

Much of the discussion surrounding possible legislation also preserves the "too big to fail" concept to the detriment of all market participants. Designating firms for special prudential regulation would inevitably create a list of "too big to fail" institutions. Some companies would become safer bets than others and receive funding and other advantages. This would simply recreate the GSE problem on a broader scale.

Regulators should have appropriate tools to address systemically risky activities including setting capital and liquidity standards. However, the Chamber opposes actions that would place a government imposed ceiling on the growth of U.S. companies. Placing a defined or arbitrary cap on the size of U.S. businesses would deter the growth of domestic companies and decrease America's economic competitiveness in relation to foreign markets.

II. Prevent the Separation of Commercial and Financial Activities for Non-Bank Institutions and Potential Regulation of Non-Financial Companies

The Chamber strongly opposes requiring the separation of the commercial and financial activities of identified companies or those non-bank institutions holding depositories. Such restrictions would not promote greater safety and soundness or stem further systemic risk. Rather, they would severely limit credit availability to important Main Street sectors of the economy like healthcare, energy, retail, aviation, farming, and vehicle financing. Many companies use financing arms to finance purchases of the products they produce and sell, or own banks to reduce operational costs. These are important functions for main-line companies in a 21st century economy.

The Chamber believes that systemic risk regulation is important for the operation of a 21st century economy, but opposes setting duplicative standards for holding companies and subsidiaries, including the requirement to have finance subsidiaries of industrial companies regulated like depository institutions with the corresponding restrictions. Greater coordination among regulators should result in regulatory, oversight, and examination processes that are streamlined to avoid duplication – not a new, two-tiered system of standards. Such a result would adversely impact economic growth and job creation.

III. Improvements to the Asset-backed Securitization Process

The Chamber opposes an unnecessarily high retention requirement for originators and securitizers of loans. The Chamber supports the goal of ensuring lenders adhere to solid underwriting standards and have appropriate "skin in the game," but is concerned that an unnecessarily high standard would have negative and unintended consequences for the mortgage market and the broader securitization market that plays a critical role in America's capital markets.

The Chamber supports a retention requirement of 5 percent, such as that adopted in H.R. 4173, the "Wall Street Reform and Consumer Protection Act," and the European Union, a requirement that either the originator or securitizer retain this interest, but not both.

IV. Resolution Authority

The goal of enhanced resolution authority should be to accelerate the orderly dissolution of failing firms, not to sustain them. With the right tools, the Chamber believes institutions can be allowed to fail without threatening the overall stability of markets. No firm should operate under the expectation that it will receive financial assistance if it gets into trouble. This resolution authority must set clear and specific guidelines that provide predictability and transparency for all market participants. Ultimately, the existing bankruptcy process, with its predictable rules, should be relied on to the greatest extent possible. By supporting a weakened company with government cash infusions for up to two or three years, the government will create competitive inequities in the marketplace. The Chamber also opposes taxing competitors to keep a failing firm in business. Healthy companies that weather tough economic times should not have to pay for the government's costs of keeping a failing competitor in operation.

V. The Volcker Rule

The Chamber believes that the intent of the proposed Volcker rule to stabilize the financial sector is a good one. However, the rule itself may be too restrictive for a growing economy and the prohibition of certain activities by financial institutions may place America's capital markets at a distinct competitive disadvantage. Accordingly, the Chamber suggests that other pro-growth tools be used by regulators, such as heightened capital requirements and liquidity standards, to achieve the intent of the Volcker Rule.

The Chamber appreciates the challenge the Committee faces to craft legislation that would revamp and modernize the financial regulatory system. However, we urge the Committee to consider these concerns as the process continues. The Chamber looks forward to working with Congress on these important issues.

Sincerely,

R. Bruce Josten

Cc: The Members of the Committee on Banking, Housing, and Urban Affairs