With the direction of financial regulatory reform again unclear, Deputy Secretary of the Treasury Neal S. Wolin recently testified before the Senate Committee on Banking, Housing, and Urban Affairs about the Administration's recent proposals to prohibit certain risky financial activities at banks and bank holding companies and to prevent excessive concentration in the financial sector. Wolin's testimony initially focused on the goals of financial reform:
- make the markets for consumers and investors fair and efficient;
- lay the foundation for a safer, more stable financial system, less prone to panic and crisis;
- safeguard American taxpayers from bearing risks that ought to be borne by shareholders and creditors; and
- end, once and for all, the dangerous perception any financial institution is "Too Big to Fail."
Wolin then laid out the formula the Administration sees as key to effective reform:
- All large and interconnected financial firms, regardless of their legal form, must be subject to strong, consolidated supervision at the federal level.
- The largest, most interconnected firms should face significantly higher capital and liquidity requirements.
- The core infrastructure of the financial markets must be strengthened. Critical payment, clearing, and settlement systems, as well as the derivatives and securitization markets, must be subject to thorough, consistent regulation to improve transparency, and to reduce bilateral counterparty credit risk among our major financial firms.
- The government must have robust authority to unwind a failing major financial firm in an orderly manner – imposing losses on shareholders, managers, and creditors, but protecting the broader system and ensuring that taxpayers are not forced to pay the bill.
- The government must have appropriately constrained tools to provide liquidity to healthy parts of the financial sector in a crisis, in order to make the system safe for failure.
- We must have a strong, accountable consumer financial protection agency to set and enforce clear rules of the road for providers of financial services – to ensure that customers have the information they need to make fully informed financial decisions.
- We should impose mandatory limits on proprietary trading by banks and bank holding companies, and related restrictions on owning or sponsoring hedge funds or private equity funds, as well as on the concentration of liabilities in the financial system.
- Given the increasing reliance on non-bank financial intermediaries and non-deposit funding sources in the U.S. financial system, it is important to supplement the deposit cap with a broader restriction on the size of the largest firms in the financial sector.
Wolin emphasized that these proposals "do not represent an 'alternative' approach to reform. Rather, they are meant to supplement and complement the set of comprehensive reforms put forward by the Administration last summer and passed by the House of Representatives before the holidays."
The full text of Deputy Secretary of the Treasury Neal S. Wolin's prepared testimony is available at: http://www.ustreas.gov/press/releases/tg530.htm