Group Says CFTC Must Weigh Costs/Benefits

The comment period expired this week for the CFTC's proposed end-user exception to mandatory clearing of swaps, with over 70 comments posted. A comment letter from the Coalition for Derivatives End-Users (from the web site of whose study agent a brace of advisor-academics recently decamped) urges a host of changes, and argues that Dodd-Frank implementing rules issued by the CFTC are subject to a cost-benefit analysis requirement, which the agency has not followed:

"Section 15(a) of the Commodity Exchange Act ('CEA') requires the Commission to evaluate the costs and benefits of any new rule promulgated under the CEA. . . . In this and previous notices of proposed rulemaking implementing the Dodd-Frank Act, the Commission has taken the position that Section 15(a) 'does not require the Commission to quantify the costs and benefits of a new regulation.' Instead, the Commission’s cost-benefit analysis consists of a recitation of the new rule’s requirements—in this case, the notification requirement—and an announcement that the cost of compliance will be 'minimal.' But the Commission has made no attempt to estimate or objectively value the costs imposed by this and other rulemakings under the Dodd-Frank Act. We believe that the Commission's current approach does not satisfy the requirements of Section 15(a). . . . Courts have not hesitated to vacate or remand agency rules founded on irrational or incomplete cost-benefit analyses." (notes omitted)

Basel III Impact - Modeling Difficulties

"Three crucial elements of the new regulatory framework are higher minimum capital ratios, higher quality of capital, and tighter liquidity requirements. To answer the questions listed in the introduction we need to 'feed' these features into the available macroeconomic models. This is all but straightforward. First, some of the models do not feature bank liquidity, or bank capital, or both. Second, even the models featuring bank capital are typically estimated or calibrated based on measures of capitalization other than the TIER 1 measure chosen in the Basel III accord. Third, even the models that feature bank liquidity adopt very simple definitions (eg the ratio of cash and government bonds to total assets), quite distant from the complex measures introduced by the new rules."

BIS Working Papers
No 338
BASEL III: Long-term impact on economic performance and fluctuations

http://www.bis.org/publ/work338.pdf

Bagehot's Lombard Street: Impartial Criticism

"I fear that I must not expect a very favourable reception for this work. It speaks mainly of four sets of persons—the Bank of England, Joint Stock Banks other than that Bank, private bankers, and bill-brokers; and I am much afraid that neither will altogether like what is said of them. I can only say that the opinions now expressed have not been formed hastily or at a distance from the facts; that, on the contrary, they have been slowly matured in 'Lombard Street' itself, and that, perhaps, as they will not be altogether pleasing to any one, I may at least ask for the credit of having been impartial in my criticism." -- from Advertisement