Just over one year ago, when President Obama took office, the financial system was teetering on the edge. A failing financial system threatened to drag the economy into the depths of another Great Depression. Decisive action staved off the worst.
And yet the costs to every American of the financial crisis have been devastating nonetheless. Many have seen their house values drop precipitously, their savings threatened, their jobs eliminated or reduced, and their small businesses lose financing. This Administration is pursuing a broad array of initiatives to help American families recover from this devastation.
There are encouraging signs that recovery is beginning to take hold. The Administration's strong steps to restore confidence in the financial system helped lay the groundwork for growth. The recovery act enacted by Congress and signed by President Obama has helped businesses keep their doors open and workers keep their jobs.
But we need comprehensive financial reform to rebuild our economy on a more stable foundation. The crisis reminded us painfully how much the larger economy depends on a well-functioning financial system. Our system was unstable--so unreliable it could collapse seemingly overnight. It was inefficient, funneling trillions of dollars into a housing bubble instead of into productive investments that would grow the economy over the long term. And it was unfair, as community banks lost market share to less responsible competitors using risky tactics that hurt responsible families and small businesses.
Reform is about security for families in their savings. It's about laying the foundation for investment in our small businesses and entrepreneurs. It's about creating a level playing field for responsible financial service providers. It's about promoting the growth we need to create jobs.
We are at a critical time in our efforts to pass comprehensive reform. We have a chance to enact the strongest, most important financial reforms since those that followed the Great Depression. We need to get the job done so that our country can focus its full attention on healing the damage that has been inflicted and building a sustainable economy for the future.
I want to start today by talking about the five reasons that we need reform, and need it now. Secretary Geithner has repeatedly laid out this clear-cut case for reform. I will close by discussing the benefits of comprehensive reform for community banks in particular.
The five reasons why we need reform, and need it now.
The first reason is that the failures in our system were devastating . In the last two years, more than 8 million people have lost their jobs. Too many small businesses have closed, and others are struggling to find the credit they need to maintain operations and hire new workers. And American families have lost trillions of dollars in savings and home equity. The damage--particularly to the middle class--has been greater than any financial crisis in generations.
Many factors contributed to this crisis, including unrealistic expectations about rising housing prices and widespread failures in corporate risk management. We will debate other causes for years to come. But there can be no dispute that the crisis was also the result of failures in government oversight, due in large part to a financial regulatory system so open to arbitrage that it permitted a fast and furious race to the bottom in standards.
As community banks know firsthand, weak and fragmented regulation and enforcement has been a recipe for a vicious cycle of deteriorating standards. Financial services providers were able to shop for the weakest regulation and the most compliant regulator. Explosive growth in less regulated sectors allowed risk and leverage to build up, even as it applied pressure on traditional banks to loosen their standards.
The regulators did not keep standards from falling. By the time they acted to provide basic standards for the sale and underwriting of subprime mortgages, the subprime explosion was nearly over. The country was already heading towards the worst financial crisis in generations, with a regulatory system that did not provide sufficient buffers and tools to minimize the damage from failing firms. These were tragic and devastating failures that should never be repeated.
The second reason we need reform--now--is that the crisis has proven that market discipline alone is not enough . We all agree that market discipline is necessary and beneficial. But this experience has demonstrated that market discipline cannot effectively compensate for weak oversight.
At its peak, the "shadow banking system" of companies that engage in the business of banking but are not regulated as banks financed roughly $8 trillion in assets. The shadow system grew almost as large as the traditional financial system. It operated with little if any regulation, on the assumption that market discipline was sufficient.
But the market did not effectively discipline companies in the shadow banking system. They accumulated massive risk, and pressured traditional banks to engage in many of the same unsustainable practices. When investors finally lost confidence, the resulting run on both the shadow and traditional financial systems put the entire economy in jeopardy.
We cannot rely on the same failed strategy and the same failed regulatory system going forward. To be stable and efficient, markets need common sense rules of the road.
We need to bring derivatives trading out of the dark. We need to reform our securitization markets and credit rating agencies. And we need to be sure that large, interconnected financial firms are subject to comprehensive capital and supervision standards, whatever their corporate form.
The third reason we need reform--now--is to generate innovation, efficiency, and economic growth. One of the great strengths of the American financial system has been the way it has channeled savings to finance future innovation. But in the run up to the crisis, that same system invested trillions of dollars in a housing bubble while under-investing in innovation, infrastructure, and new technologies.
The business community cannot afford to leave the debate about financial reform to the protectors of Wall Street. We cannot let the weaknesses of the current regulatory system remain, lest our economic recovery be erected on a crumbling foundation.
The fourth reason we need reform--now--is that we are more vulnerable than ever to future crises. The Obama Administration when it took office acted quickly to break the back of the financial panic, recapitalize the system, and reopen the markets for equity capital and debt. We succeeded at a much lower cost than almost anybody expected. And if Congress adopts the President's Financial Crisis Responsibility Fee, we will have succeeded at zero cost to the American taxpayer.
But we are still living with the same flawed financial system that brought us to this point. And without reform, the very success of the crisis response makes future crises more likely. Without reform, the expectation that some firms are too big to fail will survive. And risk will build up again in parts of the financial system where regulatory authority is lacking.
We must close these loopholes so no major firm escapes serious oversight. We must have comprehensive reform of our financial markets, including for derivatives transactions and securitization of mortgages. We must consolidate federal consumer financial protection in a truly accountable, truly independent body with the resources to maintain standards in every corner of the market. And we must end the perception of "too big to fail."
The final reason we need reform-- today--is that delay will increase uncertainty and undermine growth. Even with improving markets, many banks reportedly are lending less in part because of their uncertainty over the path of financial reform. Delay hinders economic growth by prolonging uncertainty. Delay hurts community banks and their customers--the American families and businesses that are still struggling to rebuild what has been lost. They need a stable and predictable financial system--one where all financial service providers are held to the same minimum federal standards--to concentrate on the hard work of recovery. They cannot afford any further delay.
Opponents of reform who are seeking to delay or weaken it are not speaking to the real interests of community banks, small businesses, or American families. Opponents of reform are seeking to protect vested interests on Wall Street that have benefited from the flaws in the regulatory system and want to perpetuate those flaws.
The benefits to community banks of strong legislation.
The Senate bill offers significant benefits to community banks. First, the bill contains strong measures to put an end to the perception that some firms are "too big to fail." This perception has given the largest firms an unfair funding advantage over smaller banks. The bill would explicitly mandate that a failing financial firm would be sold off, broken apart, and liquidated. Culpable management would be replaced, creditors would be allowed to suffer losses, and shareholders would be wiped out. In addition, by requiring assessments on the largest firms in the financial industry to recoup any losses, the bill makes absolutely clear that large financial firms--not taxpayers or smaller firms--would bear any costs associated with the resolution of a failed large financial firm. Anyone who argues the Senate bill perpetuates taxpayer bailouts just hasn't read the bill, or is willfully misrepresenting it.
The bill would level the playing field for traditional banks by applying the same minimum standards to the unregulated financial firms in the shadow banking system that compete with them. Today, more than 15 times as many federal dollars are spent on consumer protection oversight of banks as on nonbank financial service providers. The Senate bill's bureau of consumer financial protection would have a mandate to address that imbalance and ensure high minimum standards across the marketplace.
Community banks would continue to follow the federal consumer financial laws they follow today, but with assurances that their competitors would be held to the same minimum federal standards. Consolidating consumer protection authority in a single, accountable body will prevent the largest banks from shopping for the weakest protection standards. Consolidation means that government could act much faster to address emerging issues--months rather than the years it took federal agencies to set common-sense standards for subprime teaser-rate mortgages. And consolidation means that a single federal agency will be held accountable for examining and enforcing federal law against the financial service providers that pose the most risk to consumers and fair competition – very large banks, companies in the mortgage business, and other non-bank financial services companies.
In the coming days and weeks, we will be pressing to finish the job of financial reform. The urgency of reform is increasing--not decreasing--as the crisis recedes. It has now been two and a half years since the crisis started. It has been ten months since President Obama first laid out a proposal for comprehensive reform. And it has been four months since the House of Representatives passed their major reform bill. Now, the Senate is preparing to act.
As the President said last week, Wall Street reform is an absolutely essential part of the foundation for economic growth in this new 21st century. As we seek to revive this economy, it is incumbent on us to rebuild it stronger than before. We welcome the significant contributions that community banks can make to common sense reform and to recovery of the broader American economy.