Feb.Treasury Sec . Geithner Discusses State of Wall Street Reform
Following a closed-door meeting of the Financial Stability Oversight Council (FSOC) this week, Treasury Secretary Timothy Geithner outlined in a speech the progress of financial reform and regulators’ goals for 2012.
Geithner said regulators expect to put in place the remaining key elements of safeguards for the financial system, make progress building reforms to the housing finance system, including the path toward winding down the government-sponsored enterprises (GSEs), and communicating with global regulatory counterparts to ensure a level playing field and adequate safeguards for the global financial system.
Geithner laid out accomplishments, such as higher capital and liquidity requirements, the FDIC’s resolution authority rules, new derivatives regulations, as well as work being done by the Consumer Financial Protection Bureau (CFPB).
Geithner said regulators are “taking the time necessary to get the substance right, providing for extensive public comment and input, and working with the relevant agencies here and around the world to provide a common set of safeguards.”
“We are trying to be careful to look not just at the individual rules in isolation, but also the way rules interact with each other and the broader economy,” Geithner said. “We want to be careful to get the balance right …”
He warned “those who are still working to delay and weaken reforms will only increase uncertainty and damage our efforts to get the rest of the world to adopt a level playing field.”
“New rules on capital and liquidity will limit leverage by requiring banks to hold more financial reserves against risk and to fund themselves more conservatively,” he said. “These new safeguards are critical to reducing the risk of large financial failures and limiting the damage those failures can cause to the broader economy. In 2012, we will focus on defining the new liquidity standards and on making sure that capital risk-weights are applied consistently.”
Geithner said those reforms are being complemented by other safeguards to limit risk-taking, such as the Volcker Rule and a new limit on the size of firms and the concentration of the financial system.
“And the core constraints on leverage will apply not just to banks, but also to other large financial institutions that could pose a threat to the stability of the financial system,” he said, adding that the FSOC will “make the first of these designations” this year.
Geithner also laid out a “carefully designed new set of safeguards against risk outside the banking system and enhanced protections for the basic ‘infrastructure’ or plumbing of the financial markets”:
- Money market funds will face new requirements designed to limit their vulnerability to “runs” like the one that took place in 2008, with the SEC planning to propose significant reforms this year.
- 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 (CDS).
- Designated financial market utilities will be subject to comprehensive oversight and required to hold stronger financial cushions against risk.
Geithner also spoke about too big to fail (TBTF), saying there is now a much stronger set of protections in place against the TBTF problem.
The Treasury Secretary said the U.S. faces an “important level playing field challenge that results from the segmented nature of our supervisory and regulatory system.”
He said regulators want to make sure that financial firms engaged in similar activity and financial instruments that have similar characteristics “are treated roughly the same” so as to not shift risk to where the rules are “softer.”
“Where Congress has given the independent agencies the authority to align their rules, they should do so,” he said. “And as regulators work to close the gaps in our system, they must work together to prevent new ones from forming.”
Geithner also spoke about leveling the global playing field and the need for globally aligned reforms, especially those 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,” he said.
“And because in some areas U.S. reforms are tougher or just different from the rules forthcoming in other markets, we need to figure out a sensible way to apply those rules to the foreign operations of U.S. firms and the U.S. operations of foreign firms,” he said. “This is very complicated and another example of where we need a clearly articulated common approach across the U.S. regulatory agencies.”
On housing finance reform, Geithner said he wants to make progress this year in reforms to the mortgage market in the United States, including a path for winding down the GSEs.
“We expect to lay out more detail around approaches to reform in the spring, and we plan to begin exploring options for legislation more intensively with Chairmen [Spencer] Bachus and [Tim] Johnson and Ranking Members [Barney] Frank and [Richard] Shelby,” he said.
To open up the mortgage markets to more private capital, Geithner said this cannot happen without “more clarity on the rules that will apply, so we want to move forward using the authority we have and to pull forward the prospects for broader legislation to replace the GSEs and reform the rest of the market.”
On the availability of credit, he warned that 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, “are careful not to overdo it with actions that cause undue damage to the availability of credit or liquidity to markets.”
Geithner closed with acknowledging that no financial system is “invulnerable to crisis,” but the American financial system is now much less vulnerable than it was and is now “able to help finance a growing economy, rather than being a drag on overall economic growth.”
During a brief question-and-answer session, Geithner noted that “the challenge is making sure our political systems can find a way to act in support of sensible reforms” and that those challenges, he believes, are more political than economic as they require consensus.
In response to a question on reforms that may limit innovation, Geithner said regulators are not attempting to design a financial system that takes out the room for innovation but instead creates a system that is safer and more resilient to failures.
In response to a question about reforms having a negative effect on economic recovery, Geithner said there is no credible evidence of such a material negative effect.
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Following a closed-door meeting of the Financial Stability Oversight Council (FSOC) this week, Treasury Secretary Timothy Geithner outlined in a speech the progress of financial reform and regulators’ goals for 2012.
Geithner said regulators expect to put in place the remaining key elements of safeguards for the financial system, make progress building reforms to the housing finance system, including the path toward winding down the government-sponsored enterprises (GSEs), and communicating with global regulatory counterparts to ensure a level playing field and adequate safeguards for the global financial system.
Geithner laid out accomplishments, such as higher capital and liquidity requirements, the FDIC’s resolution authority rules, new derivatives regulations, as well as work being done by the Consumer Financial Protection Bureau (CFPB).
Geithner said regulators are “taking the time necessary to get the substance right, providing for extensive public comment and input, and working with the relevant agencies here and around the world to provide a common set of safeguards.”
“We are trying to be careful to look not just at the individual rules in isolation, but also the way rules interact with each other and the broader economy,” Geithner said. “We want to be careful to get the balance right …”
He warned “those who are still working to delay and weaken reforms will only increase uncertainty and damage our efforts to get the rest of the world to adopt a level playing field.”
“New rules on capital and liquidity will limit leverage by requiring banks to hold more financial reserves against risk and to fund themselves more conservatively,” he said. “These new safeguards are critical to reducing the risk of large financial failures and limiting the damage those failures can cause to the broader economy. In 2012, we will focus on defining the new liquidity standards and on making sure that capital risk-weights are applied consistently.”
Geithner said those reforms are being complemented by other safeguards to limit risk-taking, such as the Volcker Rule and a new limit on the size of firms and the concentration of the financial system.
“And the core constraints on leverage will apply not just to banks, but also to other large financial institutions that could pose a threat to the stability of the financial system,” he said, adding that the FSOC will “make the first of these designations” this year.
Geithner also laid out a “carefully designed new set of safeguards against risk outside the banking system and enhanced protections for the basic ‘infrastructure’ or plumbing of the financial markets”:
- Money market funds will face new requirements designed to limit their vulnerability to “runs” like the one that took place in 2008, with the SEC planning to propose significant reforms this year.
- 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 (CDS).
- Designated financial market utilities will be subject to comprehensive oversight and required to hold stronger financial cushions against risk.
Geithner also spoke about too big to fail (TBTF), saying there is now a much stronger set of protections in place against the TBTF problem.
The Treasury Secretary said the U.S. faces an “important level playing field challenge that results from the segmented nature of our supervisory and regulatory system.”
He said regulators want to make sure that financial firms engaged in similar activity and financial instruments that have similar characteristics “are treated roughly the same” so as to not shift risk to where the rules are “softer.”
“Where Congress has given the independent agencies the authority to align their rules, they should do so,” he said. “And as regulators work to close the gaps in our system, they must work together to prevent new ones from forming.”
Geithner also spoke about leveling the global playing field and the need for globally aligned reforms, especially those 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,” he said.
“And because in some areas U.S. reforms are tougher or just different from the rules forthcoming in other markets, we need to figure out a sensible way to apply those rules to the foreign operations of U.S. firms and the U.S. operations of foreign firms,” he said. “This is very complicated and another example of where we need a clearly articulated common approach across the U.S. regulatory agencies.”
On housing finance reform, Geithner said he wants to make progress this year in reforms to the mortgage market in the United States, including a path for winding down the GSEs.
“We expect to lay out more detail around approaches to reform in the spring, and we plan to begin exploring options for legislation more intensively with Chairmen [Spencer] Bachus and [Tim] Johnson and Ranking Members [Barney] Frank and [Richard] Shelby,” he said.
To open up the mortgage markets to more private capital, Geithner said this cannot happen without “more clarity on the rules that will apply, so we want to move forward using the authority we have and to pull forward the prospects for broader legislation to replace the GSEs and reform the rest of the market.”
On the availability of credit, he warned that 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, “are careful not to overdo it with actions that cause undue damage to the availability of credit or liquidity to markets.”
Geithner closed with acknowledging that no financial system is “invulnerable to crisis,” but the American financial system is now much less vulnerable than it was and is now “able to help finance a growing economy, rather than being a drag on overall economic growth.”
During a brief question-and-answer session, Geithner noted that “the challenge is making sure our political systems can find a way to act in support of sensible reforms” and that those challenges, he believes, are more political than economic as they require consensus.
In response to a question on reforms that may limit innovation, Geithner said regulators are not attempting to design a financial system that takes out the room for innovation but instead creates a system that is safer and more resilient to failures.
In response to a question about reforms having a negative effect on economic recovery, Geithner said there is no credible evidence of such a material negative effect.