Geithner Outlines Accomplishments, Future of Financial Reform

Treasury Secretary Timothy Geithner toldrnthe Financial Stability Oversight Council that the financial system is gettingrnstronger and safer and that much of the excess risk-taking and carelessrnfinancial practices that caused so much damage has been forced out.  However, he said, “These gains will erodernover time if we are not able to put our full reforms into place.”</p

He outlined the basic framework has beenrnlaid, with new global agreements to limit leverage, rules for managing thernfailure of a large firm and the new Consumer Financial Protection Bureau (CFPB)rnup and running, and the majority of the new safeguards for derivatives markets proposed.  Geithner ticked off the major accomplishmentsrnof reform.</p

First, banks now face muchrntougher limits on risk which are critical to reducing the risk of largernfinancial failures and limiting the damage such failures can cause.  The focus in 2012 will be “on defining thernnew liquidity standards and on making sure that capital risk-weights arernapplied consistently.”</p

 The new rules are tougher onrnthe largest banks that pose the greatest risk and are being complemented byrnother limits on risk-taking such as the Volcker Rules and limits on the size ofrnfirms and concentration of the financial systems.  These will not apply only to banks but tornother large financial institutions that could pose a threat to financial systemrnstability and this year the Risk Council will make the first of theserndesignations.</p

Second, the derivatives market will,rnfor the first time, be required to meet a comprehensive set of transparencyrnrequirements, margin rules and other safeguards.  These reforms are designed to movernstandardized contracts to clearing houses and trading platforms and will berncomplemented with more conservative safeguards for the more complex andrnspecialized products less amenable to central clearing and electronicrntrading.  These reforms, the balance ofrnwhich will be outlined this year, will lower costs for those who use thernproducts, allow parties to hedge against risk, but limit the potential forrnabuse, the Secretary said. </p

Third, is a carefully designed setrnof safeguards against risk outside the banking system and enhanced protectionsrnfor the basic infrastructure of the financial markets:  </p<ul class="unIndentedList"<liMoney market funds will have newrnrequirements designed to limit "runs."</li<liImportant funding markets like therntri-party repo market are now more conservatively structured.</li<liInternational trade repositories arernbeing developed for derivatives, including credit default swaps. </li<liDesignated financial market utilitiesrnwill have oversight and requirements for stronger financial reserves;</li</ul

Fourth; there will be a stronger setrnof protections in place against “too big to fail” institutions.  The key elements are:</p<ul class="unIndentedList"<liCapital and liquidity rules withrntough limits on leverage to both reduce the probability of failure and preventrna domino effect; </li<liNew protections for derivatives,rnfunding markets, and for the market infrastructure to limit contagion acrossrnthe financial system;</li<liTougher limits on institutional size;rn</li<liA bankruptcy-type framework tornmanage the failure of large financial firms.rnThis "resolution authority" will prohibit bailouts for privaterninvestors, protect taxpayers, and force the financial system to bear the costsrnof future crisis. </li</ul

Fifth, significantly strongerrnprotections for investors and consumers are being put in place including thernCFPB which is working to improve disclosures for mortgages and credit cards andrndeveloping new standards for qualified mortgages.  New authorities are being used to strengthen protectionsrnfor investors and to give shareholders greater voice on issues like executiverncompensation. </p

Geithner pointed to the failure ofrnaccount segregation rules to protect customers in the MF Global disaster as proofrnof the need for more protections and said that the Council will work with thernSEC and the Commodity Futures Trading Council on this problem.   </p

Moving forward, reforms must bernstructured to endure as the market evolves and to work not just in isolationrnbut to interact appropriately with each other and the broader economy.  “Wernwant to be careful to get the balance right-building a more stable financialrnsystem, with better protections for consumers and investors, that allows forrnfinancial innovation in support of economic growth.”  </p

First, he said, we have to make surernwe have a level playing field at home; that financial firms engaged in similarrnactivity and financial instruments that have similar characteristics arerntreated roughly the same because small differences can have powerful effects inrnshifting risk to where the rules are softer. rnA level field globally is also important, particularly with reforms thatrntoughen rules on capital, margin, liquidity, and leverage, as well as in thernglobal derivatives markets.  “In these areas we are working to discouragernother nations from applying softer rules to their institutions and to try tornattract financial activity away from the U.S. market and U.S. institutions.” rn</p

It is necessary to align therndeveloping derivatives regimes around the world; preventing attempts to softenrnapplication of capital rules, limiting the discretion available to supervisorsrnin enforcing rules on risk-weights for capital and designing rules forrnresolution of large global institutions.  Also, because some U.S. reforms are differentrnor tougher from rules in other markets, there needs to be a sensible way tornapply those rules to the foreign operations of U.S. firms and the U.S.rnoperation of foreign firms.</p

 The U.S. also needs to movernforward with reforms to the mortgage market including a path to winding downrnthe government sponsored enterprises (GSEs.) rnThe Administration has already outlined a broad strategy, Geithner said,rnand expects to lay out more detail in the spring.  The immediate concern is to repair the damagernto homeowners, the housing market, and neighborhoods.  The President spoke this week about the rangernof tools he plans to use.  Our ultimate goalsrnare to wind down the GSEs, bring private capital back into the market, reducernthe government’s direct role, and better target support toward first-timernhomebuyers and low- and moderate-income Americans.</p

Geithner said the new system mustrnfoster affordable rentals options, have stronger, clearer consumer protections,rnand create a level playing field for all institutions participating in thernsystem.  For this to happen withoutrnhurting the broader economy and adding further damage to those areas that havernbeen hardest hit, banks and private investors must come back into the market onrna larger scale and they want more clarity on the rules that will apply.  </p

Credit availability is still a problemrnand there is a broad array of programs in place to improve access to credit andrncapital for small businesses.  Asrnconditions improve, it is important that we remain focused on making sure thatrnsmall businesses, a crucial engine of job growth, have continued access tornequity capital and credit.</p

Many Americans trying to buy a homernor refinance their mortgage are also finding it hard to access credit, even forrnFHA- or GSE-backed mortgages.  The Administration has been working closelyrnwith the FHA and FHFA to encourage them to take additional measures to removernunnecessary barriers and they are making progress.  They will probably outline additional reformsrnin the coming weeks. </p

Bank supervisors, in the normalrnconduct of bank exams and supervision, as well as in the design of new rules tornlimit risk taking and abuse, must be careful not to overdo it with actions thatrncause undue damage to the availability of credit or liquidity to markets. </p

Geithner said the U.S. financialrnsystem is getting stronger, and is now significantly stronger than it wasrnbefore the crisis.  Among the achievements:</p<ul class="unIndentedList"<liBanks have increased common equityrnby more than $350 billion since 2009.</li<liBanks and other financialrninstitutions with more than $5 trillion in assets at the end of 2007 have beenrnshut down, acquired, or restructured. </li<liThe asset-backed commercial paperrnmarket has shrunk by 70 percent since its peak in 2007, and the tri-party repornmarket and prime money market funds have shrunk by 40 percent and 33 percentrnrespectively since their 2008 peaks.</li<liThe financial assistance we providedrnto banks through TARP, for example, will result in taxpayer gains ofrnapproximately $20 billion.</li</ul

The Secretary said the strength ofrnthe banks is helping to support broader economic growth, including the morernthan 3 million private sector jobs created over 22 straight months, and the 30rnpercent increase in private investment in equipment and software.  rnBroadly, the cost of credit has fallen significantly since late 2008 and earlyrn2009.  Banks are lending more, with commercial and industrial loans tornbusinesses up by an annual rate of more than 10 percent over the past sixrnmonths.   </p

He concluded by saying that nornfinancial system is invulnerable to crisis, and there is a lot of unfinishedrnbusiness on the path of reform.  The reforms are tough where they need tornbe tough.  “But they will leave our financial system safer, better able tornhelp businesses raise capital, and better able to help families finance safelyrnthe purchase of a house or a car, to borrow to invest in a college education,rnor to save for retirement.  And they will protect the taxpayer from havingrnto pay the price of future crisis.”</p<prnrnrnrnrnrnrnrnrnrnrn

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