Clayton Comments from ICI's GMM
Last week, at the Investment Company Institute's 2021 Virtual General Membership Meeting, ICI President Eric Pan sat down with former SEC Chair Jay Clayton and former CFTC Chair J. Christopher Giancarlo to discuss regulatory issues. Speaking about March 2020, Clayton comments, "If we're going to count on [banks] to provide liquidity, we need to make sure that they have the appropriate amount of freedom to provide that liquidity in times like that." Pan explains, "[With] international bodies like the FSB [Financial Stability Board] ... there's this thinking that March 2020 shows problems in the nonbank financial intermediation area, sort of outside of the banking system. Would you say that that's a fair critique of March 2020? That it really shows there are these unanswered vulnerabilities? ... Or, there actually may be things both in the banking and nonbanking sectors that need to be reviewed?" Giancarlo answers, "What I understand about what happened in the Treasury market -- it was not that the nonbanks didn't show up; it was that the regulated large banks didn't show up and the Treasury had to step in. Now, by constraining big bank balance sheets you in a sense, as Jay just said, push trading liquidity, the responsibility for it, onto nonbank financial institutions that have a different trading approach. They're not dealers.... They can just turn off the lights if the market gets too choppy for them.... Banks play a different role. There's a difference between being a dealer and being a market maker. But I'm not sure you can blame what happened in March on the nonbanks, because the liquidity provision that was expected was because some banks had to move in a different direction and not deploy capital." Clayton adds, "I agree with Chris. Oftentimes when you have periods of stress and you need intervention. People look at things that have bothered them and point to that stress as proof that those things remain risks. An area of focus now is money markets. But what we need to look at there is: money market funds backed by Treasuries are different from money market funds backed by commercial paper, and are different from money market funds backed by municipal securities. I think we now understand that, and we need to take a much more nuanced review, of just for example, money market funds.... [A]nd I think the FSB is looking at it that way if you look at the papers they've put out." Clayton also comments, "[A] more macro point, which is again, if you've pushed more capital formation outside of the banking system, it has to go somewhere or you're going to have no economic growth. And, we shouldn't be surprised that the nonbank financial system is larger today than it was in 2008, and is more important to the continued ... growth of modern economies than it was in 2008." Finally, Giancarlo adds, "I think everything we've seen, to me, proves one thing. That is the reforms to the global economic system cannot be left just in the hands of prudential regulators; there needs to be much better dialogue. All of these markets are connected, and there needs to be much better dialogue, as Jay and I started at the Federal level, and at the international level between market regulators and prudential regulators. You can't view that in a vacuum. I think one of the criticisms that I made of FSB is it's not sufficiently staffed with market regulators. It's overstaffed with prudential and central bankers, and I think as a result some of its choices reflect ... bank finance and not enough about market finance."
