As prepared for delivery
WASHINGTON - Chairman
Johnson, Ranking Member Crapo, and members of the Committee, thank you for the
opportunity to appear here today to discuss progress implementing the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Dodd-Frank Act represents the most comprehensive set of
reforms to the financial system since the Great Depression. The package of reforms President Obama signed
into law two-and-a-half years ago was a needed antidote for regulations that
were too antiquated and weak to prevent or respond effectively to a financial
crisis that inflicted devastating damage on the U.S. economy and American
families. The inadequacy of our previous
financial regulatory system was a major reason the crisis was so severe and why
the recovery has taken so long.
Americans are already beginning to see benefits of the
reforms implemented in the wake of the crisis reflected in a safer and stronger
financial system and a broader economic recovery. Although the financial markets have recovered
more vigorously than the overall economy, with the stock market near its October
2007 all-time high, the economic recovery is gaining traction. Private-sector payrolls have increased by more
than 6 million jobs from the low point in February 2010, marking the 35th
consecutive month of private-sector job growth.
The unemployment rate, while still too high at 7.9 percent, has fallen
more than two percentage points since its October 2009 peak of 10.0
percent. The recovery in the housing
market also still has further to go, but it appears to be taking firmer hold as
measured by rising home prices, stronger sales, and declining numbers of
delinquencies and defaults.
The financial regulators represented here today have been
making significant progress implementing Dodd-Frank Act reforms. Consumers have access to better information
about financial products and are benefiting from new protections. Financial markets and companies have become more
transparent. Regulators have become
better equipped to monitor, mitigate, and respond to threats to the financial
Our financial system has also become smaller as a share of
the economy and significantly less leveraged, reducing our vulnerability to a
future crisis. Capital requirements for
the largest banks have increased substantially, and U.S. banks have raised
their capital levels to approximately $1 trillion, up 75 percent from three
years ago. We have a new framework in
place for protecting the financial system, the economy, and taxpayers from the
consequences of the failure of a large financial company.
Eleven of the largest bank holding companies have already
submitted their living wills to the Federal Reserve and Federal Deposit
Insurance Corporation, and the other firms required to submit living wills will
follow suit by the end of this year, providing their regulators with a roadmap to
wind them down should they fail. The
costs of resolving a failed financial company will not be borne by taxpayers,
but by the company’s stockholders, creditors, and culpable management – and if
necessary by the financial services industry.
The newly created Consumer Financial Protection Bureau
(CFPB) has taken important steps to provide clarity on consumer financial products
for ordinary Americans. The CFPB is cracking
down on abusive practices and helping to level the playing field between banks
and nonbanks, so that they play by the same rules when dealing with customers.
Expanded enforcement authorities at the Securities and
Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), along
with their new whistleblower rules, are providing investors with increased
protections, and the agencies’ vigorous enforcement efforts should serve as a greater
deterrent to misconduct. Investors in
thousands of publicly traded companies have exercised new rights to vote on
executive compensation packages as a result of Dodd-Frank’s say-on-pay
A new framework for regulatory oversight of the
over-the-counter (OTC) derivatives market is largely in place. It will significantly reduce the risks
associated with these products and will provide much-needed transparency for
both market participants and regulators.
As a result of trade-reporting requirements, the price and volume of certain
swap transactions are now available to regulators and the public, at no charge,
and reporting for additional asset classes will begin at the end of this month. Swap dealers now have to register with the
CFTC and adhere to new standards for business conduct and recordkeeping. Beginning next month, certain types of financial
institutions transacting in clearable interest-rate or credit-index swaps must
move those transactions to central clearinghouses, reducing overall risk to the
Treasury’s responsibilities under the Dodd-Frank Act include
standing up new organizations to strengthen coordination of financial regulation
both domestically and internationally, improve information sharing, and better
identify and respond to potential risks to the financial system. Over the past 30
months, we have focused considerable effort on creating the Financial Stability
Oversight Council, the Office of Financial Research, and the Federal Insurance
Office and making them effective and efficient organizations that fulfill the
objectives established in the Dodd-Frank Act.
The Financial Stability Oversight Council
The Financial Stability Oversight Council (FSOC) has become
a valuable forum for collaboration among financial regulators and, despite its
relative youth, has become a central figure in the implementation of financial
regulatory reform and in addressing risks to the financial system.
Although FSOC members by law are required to meet only quarterly,
the FSOC has been far more active than that.
In 2012, FSOC principals met 12 times to conduct their regular business
and respond to specific market developments.
Additionally, the FSOC facilitates significant collaboration and
information-sharing at the staff level through regular meetings of its Deputies
Committee, which meets on a bi-weekly basis, and its Systemic Risk Committee,
which meets monthly.
These are key forums for coordination among regulators. There is steady and understandable demand
from the financial industry for enhanced regulatory coordination. Given the different statutory mandates and
supervisory responsibilities of the various independent financial regulators,
they are not always able to achieve as much alignment as regulated entities and
market participants might desire. However,
by having a regular forum available for frank discussion and early
identification of areas of mutual or potentially overlapping interests, the
financial regulatory community has been able to better identify issues that
would benefit from enhanced coordination.
On the international front, for example, the U.S. representatives to
groups such as the Financial Stability Board and the International Association
of Insurance Supervisors are able to use the FSOC as a means of sharing
information and collaborating with a broader group of domestic colleagues on
The benefits of strengthened coordination go beyond regulatory
implementation. One of the strongest
attributes of the FSOC has been its ability to quickly bring the key regulators
together to respond to events such as the failure of MF Global and the
disruption to financial markets caused by Superstorm Sandy.
In addition to the FSOC’s coordination role, it has certain
authority to provide for more stringent regulation of a financial activity by
issuing recommendations to the responsible regulatory agencies. An example along these lines is vulnerability
in the short-term funding markets, which the FSOC first addressed in its 2011 annual
report and then again in 2012. The focus
on this exposure ultimately led to the FSOC’s issuance for public comment of proposed
recommendations on money market mutual fund reforms. The comment period on those proposed recommendations
closes tomorrow, February 15.
The FSOC has also taken significant steps to designate and
increase oversight of financial companies whose failure or distress could
negatively impact financial markets or the financial stability of the United
States. In July 2012, the FSOC
designated eight financial market utilities, companies that play important
roles in our clearing, payment, and settlement systems, as systemically
important. These companies are now
subject to higher risk-management standards and coordinated oversight by the
Federal Reserve, the SEC, and the CFTC. The
FSOC is also in the final stages of evaluating an initial set of nonbank
financial companies for potential designation, and completing that work is an
important priority for 2013. Designated
nonbank financial companies will be subject to enhanced prudential standards
and supervision by the Federal Reserve, closing an important regulatory gap.
The Office of Financial
Treasury has made significant
progress in establishing the Office of Financial Research (OFR), which has been
further strengthened with the confirmation of Richard Berner early this year as
its first Director.
The OFR provides important
support for the FSOC, including data for the FSOC annual report as well as data
and analysis relating to the designation of nonbank financial companies. In collaboration with FSOC members, the OFR is
also developing new dashboards of financial stability metrics and indicators for
use by the FSOC’s Systemic Risk Committee.
A key part of the OFR mission
is to fill the gaps in existing data and analysis. The OFR has accordingly completed an initial
inventory of purchased and collected data among FSOC member agencies and an
inventory of internally developed data is underway. To improve the quality and scope of data
available to policymakers, the OFR has established data-sharing agreements with
a number of FSOC member agencies and continues to work on new ones as needed.
The OFR plays a leadership role
in the international initiative to establish a global Legal Entity Identifier
(LEI), a code that uniquely identifies parties to financial transactions. The OFR’s chief counsel was recently named
Chair of the LEI Regulatory Oversight Committee. With the planned launch of the global system next
month, the goal of standardizing the identification of these entities will become
a reality. Financial companies and
financial regulators worldwide will gain a better view of true exposures and
counterparty risks across the global financial system.
In July 2012, the OFR issued
its first annual report assessing the state of the U.S. financial system, the
status of the efforts by the OFR to meet its mission, and key findings of the
OFR’s research and analysis. We have
also established the Financial Research Advisory Committee, composed of 30
distinguished professionals in economics, finance, financial services, data
management, risk management, and information technology to provide advice and recommendations
to the OFR.
Federal Insurance Office
Treasury has also worked to establish the Federal Insurance Office
(FIO) and develop its ability to serve as the federal voice on insurance
issues, both domestically and internationally.
FIO is responsible for monitoring all aspects of the
insurance industry, including identifying issues or gaps in regulation that
could contribute to a systemic crisis in the insurance industry or financial
system. FIO coordinates and develops
federal policy on prudential aspects of international insurance matters;
represents the United States at the International Association of Insurance
Supervisors (IAIS); and, along with the independent insurance expert and a
state insurance commissioner, the FIO Director contributes insurance expertise
to the FSOC as a non-voting member. FIO
also monitors the accessibility and affordability of non-health insurance
products to traditionally underserved communities.
Until the establishment of FIO, the United States was not
represented by a single, unified federal voice in the development of
international insurance supervisory standards.
FIO now provides important leadership in developing international
insurance policy. In 2012, FIO was
elected to serve on the IAIS Executive Committee and as Chair of its Technical
Committee. FIO is involved with the IAIS’s
development of the methodology to identify global systemically important
insurers and the policy measures to be applied to any designated firm. Apart from its work with the IAIS, FIO
established and has provided leadership in the European Union-United States
insurance project regarding matters such as group supervision, capital
requirements, reinsurance, and financial reporting. FIO has worked and will continue to work
closely and consult with state insurance regulators and other federal agencies
in this work.
FIO will soon release its first annual report on the insurance
industry and its report on how to modernize and improve the system of insurance
regulation in the United States. FIO is
working diligently to release these and several other reports in the coming
In the year ahead, Treasury will continue to build on the
FSOC’s existing strengths as a key forum for information-sharing and
collaboration among regulators and continue to develop the expertise and
capacity of the OFR and FIO.
Although we are not a rulemaking agency for either the Dodd-Frank
Act’s Volcker rule or risk-retention rule, the Treasury Secretary, in his
capacity as Chairperson of the FSOC, has an explicit statutory coordination
role with respect to both of those rulemakings. We take that role very seriously and will
continue to work with the respective rulemaking agencies as they finalize those
Another area where we continue to engage in significant coordination
with other agencies is with respect to the Dodd-Frank Act’s new orderly
liquidation authority. We have
participated in extensive planning exercises and preparations with the Federal
Reserve and FDIC to be fully prepared to wind down a company whose failure
could have serious adverse effects on U.S. financial stability.
Our progress on
domestic implementation is mirrored by our work internationally to support
efforts to make financial regulations more consistent worldwide through the
G-20 and the Financial Stability Board (FSB).
By moving early with the passage and implementation of the Dodd-Frank
Act, we have been able to lead from a position of strength in setting the
international reform agenda and elevating the world’s standards to our
own. We remain attentive to the inevitable
inconsistencies and lags on implementation and continue to emphasize that successful
implementation of global financial regulatory reforms is essential for
promoting U.S. financial sector competitiveness; building a stable, secure, and
more resilient financial system; and avoiding regulatory arbitrage and a
race to the bottom.
We are pursuing a comprehensive
reform agenda internationally spanning bank capital and liquidity, resolution,
and OTC derivatives markets.
On capital and
liquidity, the Basel III standards raise the quality and quantity of capital
and strengthen liquidity requirements so that banks can better protect
themselves against losses of the magnitude seen in the crisis. These form the bulwark of core reforms that
will enhance the stability of the international banking system. In June 2012, the federal banking agencies
issued proposed rules and currently are working to adopt final rules to
implement the Basel III standards in 2013. It is critical that our international partners
implement Basel III faithfully as soon as possible. In fact, the majority of the largest U.S.
banks already meet Basel III capital targets – well ahead of schedule.
On resolution, we
have reached an important agreement that key financial jurisdictions should
have the tools to resolve large cross-border financial firms without the risk
of severe disruption or taxpayer exposure to loss. The FSB is working actively to see that this
international commitment by regulators will drive major global banks to develop
cross-border recovery and resolution plans; develop criteria to improve the
“resolvability” of systemically important institutions; and negotiate
institution-specific cross-border resolution cooperation arrangements.
On derivatives, U.S.
regulators have led with implementation of reforms to centrally clear
derivatives and require transaction reporting.
We have also led the call for the development of a global margin
standard for OTC derivatives that are not centrally cleared, and the G-20 and the FSB are making steady progress
in their efforts to develop such a standard.
We have made real
progress internationally on all of these fronts and must continue to do
so. As the global economy heals from the
devastation of the crisis, the urgency for reform may wane. Progress remains uneven internationally and
significant work remains. We must
redouble efforts domestically and urge our partners internationally to continue
this essential work. In particular, we
must be careful to avoid a fragmentation in financial regulation
internationally, which can lead to uneven regulation, unequal treatment, constrained
capital flows, and increased uncertainty.
Treasury will continue to work with our partners around the world to achieve
global regulatory convergence.
Financial regulatory reform implementation has presented one
of the most challenging sets of responsibilities for regulators in nearly 80
years. We have a highly complex,
international financial system with many intricately linked parts. While the demand for simple rules has a
superficial appeal, simple rules do not suffice to address the nuances of a
complex financial system. Also, as the
work of regulatory reform implementation proceeds, issues inevitably arise such
as MF Global’s failure, the so-called “London Whale” trading losses, and LIBOR
manipulation that inform the work of regulators in important ways but that also
require significant attention in and of themselves.
As we move forward, it is critical to strike the appropriate
balance of measures to protect the strength and stability of the U.S. financial
system while preserving liquid and efficient markets that promote access to
capital and economic growth. Rules must
also be properly calibrated to risks, taking into account, for example, the reduced
risks that community banks pose compared to large, complex financial
Finally, we cannot afford to succumb to complacency now as
the financial markets and economy slowly continue to recover. Efforts to repeal the Dodd-Frank Act in whole
or piecemeal or to starve regulators by underfunding them will hamper growth,
allow uncertainty to fester, and be corrosive to the strength and stability of
our financial system. The progress we
have made so far is because of the reforms that we are putting in place, not in
spite of them. Completion of these
reforms provides the best path to building a sounder foundation for continued
economic growth and prosperity.