Treasury Secretary Timothy Geithner told
the Financial Stability Oversight Council that the financial system is getting
stronger and safer and that much of the excess risk-taking and careless
financial practices that caused so much damage has been forced out. However, he said, “These gains will erode
over time if we are not able to put our full reforms into place.”
He outlined the basic framework has been
laid, with new global agreements to limit leverage, rules for managing the
failure of a large firm and the new Consumer Financial Protection Bureau (CFPB)
up and running, and the majority of the new safeguards for derivatives markets proposed. Geithner ticked off the major accomplishments
First, banks now face much
tougher limits on risk which are critical to reducing the risk of large
financial failures and limiting the damage such failures can cause. The focus in 2012 will be “on defining the
new liquidity standards and on making sure that capital risk-weights are
The new rules are tougher on
the largest banks that pose the greatest risk and are being complemented by
other limits on risk-taking such as the Volcker Rules and limits on the size of
firms and concentration of the financial systems. These will not apply only to banks but to
other large financial institutions that could pose a threat to financial system
stability and this year the Risk Council will make the first of these
Second, the derivatives market will,
for the first time, be required to meet a comprehensive set of transparency
requirements, margin rules and other safeguards. These reforms are designed to move
standardized contracts to clearing houses and trading platforms and will be
complemented with more conservative safeguards for the more complex and
specialized products less amenable to central clearing and electronic
trading. These reforms, the balance of
which will be outlined this year, will lower costs for those who use the
products, allow parties to hedge against risk, but limit the potential for
abuse, the Secretary said.
Third, is a carefully designed set
of safeguards against risk outside the banking system and enhanced protections
for the basic infrastructure of the financial markets:
Money market funds will have new
requirements designed to limit “runs.”
Important funding markets like the
tri-party repo market are now more conservatively structured.
International trade repositories are
being developed for derivatives, including credit default swaps.
Designated financial market utilities
will have oversight and requirements for stronger financial reserves;
Fourth; there will be a stronger set
of protections in place against “too big to fail” institutions. The key elements are:
Capital and liquidity rules with
tough limits on leverage to both reduce the probability of failure and prevent
a domino effect;
New protections for derivatives,
funding markets, and for the market infrastructure to limit contagion across
the financial system;
- Tougher limits on institutional size;
A bankruptcy-type framework to
manage the failure of large financial firms.
This “resolution authority” will prohibit bailouts for private
investors, protect taxpayers, and force the financial system to bear the costs
of future crisis.
Fifth, significantly stronger
protections for investors and consumers are being put in place including the
CFPB which is working to improve disclosures for mortgages and credit cards and
developing new standards for qualified mortgages. New authorities are being used to strengthen protections
for investors and to give shareholders greater voice on issues like executive
Geithner pointed to the failure of
account segregation rules to protect customers in the MF Global disaster as proof
of the need for more protections and said that the Council will work with the
SEC and the Commodity Futures Trading Council on this problem.
Moving forward, reforms must be
structured to endure as the market evolves and to work not just in isolation
but to interact appropriately with each other and the broader economy. “We
want to be careful to get the balance right-building a more stable financial
system, with better protections for consumers and investors, that allows for
financial innovation in support of economic growth.”
First, he said, we have to make sure
we have a level playing field at home; that financial firms engaged in similar
activity and financial instruments that have similar characteristics are
treated roughly the same because small differences can have powerful effects in
shifting risk to where the rules are softer.
A level field globally is also important, particularly with reforms that
toughen rules on capital, margin, liquidity, and leverage, as well as in the
global derivatives markets. “In these areas we are working to discourage
other nations from applying softer rules to their institutions and to try to
attract financial activity away from the U.S. market and U.S. institutions.”
It is necessary to align the
developing derivatives regimes around the world; preventing attempts to soften
application of capital rules, limiting the discretion available to supervisors
in enforcing rules on risk-weights for capital and designing rules for
resolution of large global institutions. Also, because some U.S. reforms are different
or tougher from rules in other markets, there needs to be a sensible way to
apply those rules to the foreign operations of U.S. firms and the U.S.
operation of foreign firms.
The U.S. also needs to move
forward with reforms to the mortgage market including a path to winding down
the government sponsored enterprises (GSEs.)
The Administration has already outlined a broad strategy, Geithner said,
and expects to lay out more detail in the spring. The immediate concern is to repair the damage
to homeowners, the housing market, and neighborhoods. The President spoke this week about the range
of tools he plans to use. Our ultimate goals
are to wind down the GSEs, bring private capital back into the market, reduce
the government’s direct role, and better target support toward first-time
homebuyers and low- and moderate-income Americans.
Geithner said the new system must
foster affordable rentals options, have stronger, clearer consumer protections,
and create a level playing field for all institutions participating in the
system. For this to happen without
hurting the broader economy and adding further damage to those areas that have
been hardest hit, banks and private investors must come back into the market on
a larger scale and they want more clarity on the rules that will apply.
Credit availability is still a problem
and there is a broad array of programs in place to improve access to credit and
capital for small businesses. As
conditions improve, it is important that we remain focused on making sure that
small businesses, a crucial engine of job growth, have continued access to
equity capital and credit.
Many Americans trying to buy a home
or refinance their mortgage are also finding it hard to access credit, even for
FHA- or GSE-backed mortgages. The Administration has been working closely
with the FHA and FHFA to encourage them to take additional measures to remove
unnecessary barriers and they are making progress. They will probably outline additional reforms
in the coming weeks.
Bank supervisors, in the normal
conduct of bank exams and supervision, as well as in the design of new rules to
limit risk taking and abuse, must be careful not to overdo it with actions that
cause undue damage to the availability of credit or liquidity to markets.
Geithner said the U.S. financial
system is getting stronger, and is now significantly stronger than it was
before the crisis. Among the achievements:
Banks have increased common equity
by more than $350 billion since 2009.
Banks and other financial
institutions with more than $5 trillion in assets at the end of 2007 have been
shut down, acquired, or restructured.
The asset-backed commercial paper
market has shrunk by 70 percent since its peak in 2007, and the tri-party repo
market and prime money market funds have shrunk by 40 percent and 33 percent
respectively since their 2008 peaks.
The financial assistance we provided
to banks through TARP, for example, will result in taxpayer gains of
approximately $20 billion.
The Secretary said the strength of
the banks is helping to support broader economic growth, including the more
than 3 million private sector jobs created over 22 straight months, and the 30
percent increase in private investment in equipment and software.
Broadly, the cost of credit has fallen significantly since late 2008 and early
2009. Banks are lending more, with commercial and industrial loans to
businesses up by an annual rate of more than 10 percent over the past six
He concluded by saying that no
financial system is invulnerable to crisis, and there is a lot of unfinished
business on the path of reform. The reforms are tough where they need to
be tough. “But they will leave our financial system safer, better able to
help businesses raise capital, and better able to help families finance safely
the purchase of a house or a car, to borrow to invest in a college education,
or to save for retirement. And they will protect the taxpayer from having
to pay the price of future crisis.”