the fall of 2008, our economy faced challenges on a scale not seen since the
Great Depression. In response, the federal government took unprecedented
actions to protect the economy and reform a broken and outdated financial
system to provide better protections for taxpayers and consumers. The notion
that these reforms are somehow a “myth,” as Rana Foroohar suggests in her
September 23, 2013 story is wrong.
is an undeniable fact that the financial system we have today – the system that
Americans rely on to take out a mortgage, save for college, open a small
business, even write a check – is safer, stronger and more resilient than it
was five years ago.
The Dodd-Frank Wall Street Reform and Consumer Protection Act has given regulators
the tools and authorities they need to monitor risk across the modern financial
system and replaced a pre-crisis regulatory regime that was built for another
era. Financial markets are now more transparent and, for the first time,
Americans now have one, dedicated consumer financial watchdog agency, the
Consumer Financial Protection Bureau. (This historic new agency, and its
recent actions on behalf of consumers, were not mentioned in Ms. Foroohar’s
is still more to do in order to protect taxpayers, consumers, and our financial
system, but it is important to paint a
realistic picture of the important changes to the financial system that have
occurred . Let’s step back and address a few larger truths about financial
reform, as categorized by the article:
Point One: Too Big To
Fail, Pace of Rulemaking and Volcker Rule
As a matter of
law, Dodd-Frank ended the notion that any firm is "too big to
fail." Banking will always involve some degree of risk-taking, and
the goal is not to eliminate all risk in banking. But now, if a financial
firm fails, taxpayers will not have to bear the cost of that failure.
Regarding the pace of reform by independent
regulators: From his first hours in
office, Secretary Lew has stepped on the accelerator for the implementation of
Dodd-Frank. In fact, he went right from his swearing-in ceremony in the Oval
Office to chair his first meeting of the Financial Stability Oversight Council,
and financial reform has been a central focus since.
Secretary Lew said earlier this summer, by the end of this year, the core
elements of the Dodd-Frank Act, including the Volcker Rule, will be substantially in place.
is also important to note that a lot has been done to strengthen the financial
system and provide better protection for taxpayers and consumers. To
date, more than three quarters of Dodd-Frank rules with deadlines before
September 3, 2013 have been proposed or finalized. This summer alone has been
an active period of implementation. For instance, banking agencies have
put in place higher capital standards and have proposed new leverage rules. The Commodity Futures Trading Commission has taken a major
step forward on the application of derivatives rules to cross-border transactions. The Securities and Exchange Commission is closer to
creating new rules for money market mutual funds. And the Financial
Stability Oversight Council (Council) designated two of the largest and most complex nonbank financial companies for consolidated supervision and enhanced
Point Two: Capital and
Strong capital requirements are essential for preventing future financial crises.
was one of the central - and simplest - lessons of the 2008 financial crisis,
one the Obama administration took to heart from the beginning. In June 2009,
President Obama called for financial firms to hold more capital to
increase their ability to withstand potential losses.
Since then, the
administration has worked with Congress, the Federal Reserve, and other
financial regulators to put stronger capital requirements at the core of our
efforts to strengthen the financial system.
efforts began by requiring the largest, most complex banking institutions to
substantially improve their capital cushions. (Today, industry-wide Tier 1
common capital levels are more than $1 trillion - up 70 percent, or $450
billion, from four years ago. Banks have also curtailed their reliance on
short-term funding, reducing their vulnerability to losses of liquidity in the
financial markets). Moreover, the new
capital rules require significantly more capital to be held against riskier
assets than before.
efforts continue as we implement heightened capital, leverage and liquidity
standards under Wall Street Reform and through the Basel and G-20 new global
standards. This summer, U.S. banking agencies proposed a leverage requirement
of 5 to 6 percent for the largest banks, versus the minimum Basel standard of 3
percent. These rules will not treat large financial institutions
and small institutions such as community banks the same. They will take
into account that large financial companies pose significantly greater and
distinct risks to the financial system.
As regulators work to implement reforms, Wall Street has already started to
change. The largest financial institutions have significantly altered
their business models. There has been movement away from risky
proprietary trading and an increased focus on traditional banking. Moreover,
these institutions are better capitalized and are less leveraged, thus
providing better protections for American taxpayers.
Point Three: Derivatives
The build-up of risk in
derivatives, one of the largest, but most opaque, financial markets was one of
the key contributors to the crisis. Wall Street Reform requires comprehensive
reform of the over-the-counter (OTC) derivatives market. And three years after the landmark law, a new framework
for regulatory oversight of the OTC market, which reduces overall risk to the
financial system, is largely in place, and includes regulation of swap dealers by
the CFTC (swap dealer registration is now in effect), derivatives clearing (certain
interest-rate and credit-index swaps are now subject to mandatory clearing by
clearinghouses), and trading/transparency requirements (transaction reporting
is also in effect).
Point Four: Shadow
risk in the so-called “shadow banking system” – the financial firms that
operated outside of the protections
and constraints we impose on banks – has fallen substantially since the crisis.
Assets in the “shadow banking system”
are roughly half the level seen in 2007. Funding through tri-party repurchase
agreements has fallen 40 percent from its peak in 2007, and asset-backed
commercial paper outstanding – which was often used to fund leveraged
off-balance sheet vehicles – is a third of what it was in 2007.
now have the authority to subject, through designation by the Council, major
financial companies operating in the United States to consolidated supervision
and adherence to heightened prudential standards, such as enhanced capital,
liquidity, and risk management requirements. That represents a dramatic
change from before the crisis, when there was no authority for such regulation of
such institutions, which comprised more than half of the financial activity in
Point Five: Culture of
there is still work to do, today the financial system is safer, stronger and
more resilient than it was before the crisis.
The largest firms pay more to borrow and operate today than at any time
prior to the financial crisis. Moreover,
the U.S. financial system is now in a position to finance a growing economy and
is no longer a source of risk to the recovery.
the author ignores this progress and focuses instead on the size of banks
relative to GDP. As the author
acknowledges, capital levels have increased and leverage ratios have fallen.
Any fair observer would credit those efforts with helping to make the financial
system safer. Moreover, with any discussion about bank size it is important to
note that the U.S. banking system is proportionally smaller than that of other
advanced economies. Even with the consolidation of some of the weakest actors
during the crisis, the United States has both the least concentrated banking
system of any major economy and the smallest banking system relative to the
size of its economy. In addition, the
availability of new legal tools established by Wall Street Reform means that
regulators will be better able to resolve these large financial institutions,
if necessary in the event of their failure.
the crisis has taught us anything, it’s that we must remain vigilant to
emerging risks in the system. The financial system is dynamic and firms are
innovative. Regulation and oversight must keep pace.
more information on the financial crisis, the federal government’s response and
subsequent efforts to reform the financial system please click below.
Anthony Coley is
Deputy Assistant Secretary for Public Affairs at the U.S. Department of the