As prepared for delivery
Good afternoon. Thank you, Dennis, for that kind
introduction and for organizing this event. It is a pleasure to be here
with all of you today to mark the fifth anniversary of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
It is a particular honor to join Senator Chris Dodd and
Congressman Barney Frank, the two central architects of the law we gather here
to celebrate. Their tireless efforts, along with those of the President
and members from both sides of the aisle, led to the passage of the most
far-reaching and comprehensive financial reforms since the Great
Depression. On behalf of everyone here, I want to thank them for their
leadership, their vision, and their unrelenting determination.
Today, as we mark this anniversary, I want to reflect on the
progress we have made over the past five years. And I’d like to begin by
putting Wall Street Reform in the context of the crisis and of what I see as
the key ingredients for a healthy relationship between the economy and the
When President Obama took office our country was in the
depths of the worst financial crisis of our lifetimes. During its darkest
moments, our economy was contracting at the fastest rate in 50 years.
Companies were shedding more than 800,000 jobs a month. Unemployment
topped 10 percent. The American automobile industry nearly
collapsed. And millions of families lost their homes and their savings.
The recession started with a financial crisis, but the loss
of confidence in our financial system spiraled into a broad economic crisis —
one that hurt families and businesses on Main Street as well as Wall
Street. Though financial stability can at times seem like an abstract
concept, the crisis demonstrated that excess risk within the financial system
can have a real impact on the lives of all Americans. When people discuss
wholesale roll back of Wall Street reform, it is important that we remember
those that suffered through the worst recession of our lifetimes: the
boarded-up store fronts, the surge of foreclosure signs, the lost retirement
savings, and all those Americans who lost their jobs. Make no mistake: an
unstable financial system harms us all.
Stability is a critical ingredient of a functioning
financial system. But we also need a financial system that promotes
sustainable, long-term economic growth, maintains transparent and deep capital
markets, and extends credit to creditworthy homeowners, consumers, and small
To that end, the Wall Street Reform set out to transform the
way the financial system operates so that it is more stable, more transparent,
and more focused on serving customers. Five years later, with nearly all
of the major rules written, the economy is growing, banks are lending, and
there is no doubt that Wall Street Reform is working.
First, our financial system is safer, stronger, and more
resilient. Before this law was enacted, many financial institutions were
undercapitalized, over-leveraged, and focused on reaping short-term
profits. The incentives were to take too much risk, and it turned out
that a significant portion of the risk was borne by customers, creditors, and
taxpayers. To realign our system, Wall Street Reform required banks to
manage their businesses more prudently, and to maintain sufficient buffers so
they can bear the costs of their own failure. During the financial crisis, this
burden was borne by others ― through private losses and public action. Going
forward, financial reform made clear that this had to change.
One of the most significant enhancements is the requirement
that banks hold more capital in their businesses. The additional capital
serves as a shock absorber allowing banks to better weather economic downturns.
Too often we hear capital characterized incorrectly as money banks “hold back”
and pile up on the sidelines — that more capital leads to less lending.
But the opposite is true: A bank with insufficient capital is a bank that
cannot lend. Over the last six years, bank shareholders have added
another $600 billion of capital, which is 600 billion more dollars that will be
available to absorb unexpected losses.
During the crisis, the largest, most complex financial
institutions often held the least capital, and their distress threatened the
stability of other firms. To address the danger posed by these institutions,
Wall Street Reform created a tiered and tailored regulatory framework that
applies differently to the largest, most complex firms. While the
regulation of all of the nation’s nearly seven thousand banks was improved by
Wall Street Reform, only the 31 largest firms, those with more than $50 billion
in assets, are subject to “enhanced prudential standards.” These
heightened requirements include capital and liquidity rules, living wills, and
stress tests, tests designed to ensure that our largest financial institutions
can weather severe storms and continue lending to support the economy.
Wall Street Reform also recognized that risks to financial
stability are not confined to traditional banks. In 2008, no government
entity was accountable for looking across the broader financial system and over
the horizon to ask tough questions and monitor emerging threats. For
example, there was inadequate regulation of large interconnected nonbank
financial firms, such as AIG and Lehman Brothers, and no accountability to
identify and respond to the risky practices that ballooned across the financial
system. When several of these nonbank companies experienced financial
distress in the lead-up to the financial crisis, they shook the stability of
the financial system and damaged the economy more broadly.
To address these gaps in our regulatory framework, Wall
Street Reform created the Financial Stability Oversight Council, also known as
the FSOC. The FSOC brings together federal and state regulators to
monitor the entire financial system and identify and respond to threats to
financial stability. The FSOC’s approach has been data driven and
deliberative and has resulted in greater scrutiny of potential risks posed by
institutions and a range of activities across the financial system. Since
its creation, the FSOC has made actionable recommendations to enhance financial
stability and designated eight financial market utilities and four nonbank
financial companies for additional oversight to help address the risks they
Through the work of the FSOC and the work of agencies like
the Securities and Exchange Commission, reform has also addressed risks in the
money market fund industry. During the crisis, some funds were
susceptible to runs; new protections were needed. The SEC is working to put in
place additional reforms for these important financial products.
To keep taxpayers from ever having to step in to save a
financial firm again, Wall Street Reform ended “too big to fail” as a matter of
law. Regulators also have modern, commonsense tools to protect taxpayers:
in the event of a crisis or failure, regulators can seize large financial
institutions and wind them down in an orderly way. And since we know that
financial crises do not respect national borders, we are finalizing a new
international standard on total loss absorbing capacity (TLAC) for global banks
at the G-20 this year, and we have supported changes to financial contracts
that will help prevent fire sales and contagion at home and abroad in the event
of future failures.
ENHANCING TRANSPARENCY IN FINANCIAL MARKETS
But ensuring stability and preventing excessive risk taking
is not enough. Functioning markets require transparency and the free flow
of information to ensure both safety and fairness. That is why Wall Street
Reform tackled the vast derivatives market, which, in 2008, was notionally
valued at more than $600 trillion. Prior to reform, derivatives were
traded privately between two parties, leaving market participants and policy
makers unable to see or understand the market as a whole. The result was
a massive web of invisible interconnections. During the crisis, losses
and potential losses from derivatives led to panic across the market.
Many market participants were highly leveraged, and had to sell their
positions, exacerbating the shock. Today, thanks to Wall Street Reform,
derivatives are subject to a comprehensive regulatory framework, and many are
centrally cleared and traded on exchanges or transparent platforms.
Transparency requirements are at work in other aspects of
Wall Street Reform as well. For example, the law now requires that hedge
fund advisers register with, and report data to the SEC. Furthermore, the
law seeks to improve corporate governance by increasing transparency around
compensation practices. And, Wall Street Reform created the Office of Financial
Research, which informs the public by delivering high-quality financial data,
standards, and analysis. This office is also leading the development of
international data standards and the implementation of a global legal entity
identifier, which will make financial data easier to use and understand.
But as the system changes, we must continue to look out for new risks and
continue to monitor new dynamics and ensure that markets remain transparent and
participants have access to clear and accurate information.
SERVING CUSTOMERS AND CONSUMERS
Safer banks and more transparent markets are essential, but
they are a means to an end: a financial system that supports a growing economy
through responsible lending to businesses and consumers. Before Wall
Street Reform, many financial institutions had lost sight of this
purpose. Reform encourages banks to take a long-term view in their
investing decisions, and to halt business strategies built around extracting
unfair and sometimes hidden fees from mortgage borrowers or making short-term
bets in securities markets.
One of the cornerstones of Wall Street Reform is the Volcker
Rule, the major components of which go into effect tomorrow. The Volcker
Rule prohibits risky proprietary trading, like the London Whale transactions,
while protecting the depth, liquidity, and stability of our capital markets,
and ultimately safeguarding taxpayers. It allows banks to provide core
services to its customers, protecting core financial activities such as
market-making, underwriting, risk-mitigating hedging, and trading in certain
Wall Street Reform did not just set out to repair capital
markets; it also sought to make sure banks are invested in the success of the
loans they originate. Another cornerstone of reform, therefore, is the
requirement that a lender — before extending a mortgage loan — make a
reasonable, good faith determination that the borrower has the ability to repay
the loan. This approach was too rare in the years leading up to the
financial crisis. For example, many lenders during the housing bubble
loaded mortgages with points and fees to get their compensation up front before
selling the loan to a third party. Excessive points and fees encouraged
lenders to “steer” borrowers into expensive products even when they qualified
for lower-cost options. These abusive lending practices and unclear
underwriting standards resulted in risky mortgages that hurt consumers and
ultimately threatened financial stability. Wall Street Reform eliminated these
predatory practices and extended protections to all home buyers while
maintaining access to credit for borrowers under terms they can understand and
afford. And so that more qualified borrowers have access to safe and affordable
mortgages, we have been working with the Federal Housing Administration (FHA)
and the Federal Housing Finance Agency (FHFA) as they seek to address frictions
in the housing market and provide clarity to lenders on issues like put-back
risk. We must also strengthen our resolve to pursue comprehensive reform of the
housing finance system.
Reform has also brought greater fairness to credit markets
by improving information. Consumers now benefit from new mortgage disclosure
forms, which are shorter and less complex and make borrowing for a home simpler
and more understandable. Similar reforms have been adopted or are being
developed for student loans, auto loans, and payday loans. The effect of
these reforms is that lenders must now focus on extending credit on fair terms
and in good faith. They must out-compete other lenders by offering better
terms, not by finding a way to sell consumers products that they don’t really
need and can’t really afford.
The independent Consumer Financial Protection Bureau, the first
regulator solely dedicated to defending Americans from financial fraud and
deception, is focused on formulating and enforcing these rules of the
road. Through these rules, the CFPB has established consumer protections
that are preventing the kinds of predatory behavior that contributed to the
financial crisis. The Bureau is making the financial marketplace work
better for all Americans. It is transforming mortgages so they are clear
and safe for customers, it is putting a stop to discrimination in auto lending,
and it is tackling abusive payday lending practices that trap some of the
poorest Americans in debt. In addition, because of the CFPB, we have put
debt collectors under federal supervision for the first time and are reining in
unscrupulous lenders who prey on the elderly.
Before Wall Street Reform, victims of financial fraud rarely
saw their money returned to them. Now, with the help of the CFPB’s
enforcement division, money is flowing back to people’s pockets. That
includes military families targeted by predatory lending schemes, consumers
bilked by dishonest marketing tactics, and homeowners hit by deceptive mortgage
servicing practices. All told, in the last five years alone, the Bureau
has secured more than $10 billion in relief for more than 17 million consumers
harmed by illegal practices in the financial marketplace.
One of the greatest strengths of the American financial
system is one generation after another of innovative financiers. The goal
of reform is not to quench the desire or ability to innovate, but to make sure
that the oversight of our financial system keeps up with the pace of
transformation. The work of reform is ongoing; it is constant, and we
must be unyielding in our pursuit of it. The progress we have made must
be renewed with each Administration, with each Congress, with each generation,
if we are to avoid another financial crisis like the one we experienced in
2008. We cannot afford to take a break from this pursuit.
In the past, policy makers have been tempted, especially
when the economy is doing well and when an emergency seems improbable, to roll
back regulations, weaken reforms, and reduce oversight. We are seeing
this kind of movement now on Wall Street and on Capitol Hill. For
example, we are hearing calls to water down new rules out of concern they are
adversely affecting liquidity in some markets. We all share an interest
in properly functioning markets, and we need to make certain that we do not
return to the pre-crisis way of doing things. As we learned in 2008,
broker-dealers with too little capital cannot provide liquidity when it is
needed most. Worse still, the painful process of broker-dealer
deleveraging further cripples markets and spreads contagion across the system.
It is a mark of progress that we now have to remind
ourselves of the lessons we learned. But it would be a grave mistake to
think that banks can self-regulate, that forces that produce excessive
risk-taking are a thing of the past, and that risks taken on Wall Street will
not harm Main Street.
Instead of slowing down our work, we must sustain and build
on the progress we have made.
In the next five years, we must build on these
accomplishments. We must focus on improving the financial system for the
users of financial services, not just for its providers. We must continue
our efforts to expand access to credit and bring private capital back into the
housing market by completing comprehensive housing finance reform. We must work
together with Congress to strengthen reform and enhance the ability of
community banks and other financial institutions to continue to serve Main
Street. As regulators continue to implement new rules, they must use the
flexibility provided by Wall Street Reform to make sure that smaller, less
complex institutions are regulated differently from larger, more complex firms.
But calibrating reforms for smaller banks is not the same as erasing important
laws that place a higher level of review on the largest thirty or forty largest
banks in the country.
We simply cannot afford to take the risk to our financial
system of making changes to this law that would weaken consumer, investor, or
taxpayer protections, or impede the ability of regulators to carry out their
missions. We must fund our regulators so that they can keep pace with
changing markets. Wall Street Reform increased the scope of the CFTC’s
responsibilities, but they need a stable source of funding to conduct their
work. Congress should bring their budget in line with their regulatory
peers and allow the agency to fund its operations using fees assessed on the
primary beneficiaries of their oversight.
We must also protect the ability of the FSOC to ask the hard
questions and to identify potential risks to the financial system, wherever
those risks reside. The FSOC is critical to understanding how new developments
change the landscape of the financial system. Today, our financial system is
growing more through the assets of hedge funds, pension funds, and mutual funds
than it is through the assets of large, complex financial institutions. This
evolution in our financial system means that we must consider a different kind
of risk and be open to different kinds of policy responses, and we need to
always be looking ahead and asking “what are the risks of the future?” to make
sure our financial system is safe. And we must finalize important rules, like
the ones that raise standards on analysts who provide retirement and investment
advice, and the ones that fix compensation practices to align incentives
between executives and shareholders, creditors, taxpayers, and customers.
We have seen attempts to roll back key safeguards by
slipping complex provisions into unrelated bills. This tactic of using
riders on must-pass legislation to chip away at crucial financial reforms is
unacceptable. And let me be clear: this Administration will strongly
oppose these efforts. Faced with bills that threaten to turn the clock
back to 2008 and leave the American people vulnerable to another crippling
crisis, I will recommend the President veto them.
In closing, I want to point out that in the aftermath of the
2008 crisis, we saw proof of what we have always known — the American people
are resilient and determined, capable and creative, fiercely independent and
profoundly generous. Rather than be disheartened, Americans took the
actions needed to emerge from economic catastrophe. They paid down their
debts, got an education, and expanded their skills. They chose to save up
for new homes, start new families, and secure their retirement. They
chose to create new businesses and new industries. And they chose to
rebuild our nation on a new foundation and lead the world once again.
Around the world the ability of the U.S. economy, the American people, and our
political process, to bounce back is once again admired and serves as an ideal
to which others aspire.
The purpose of Wall Street Reform is to make sure our
financial system is worthy of America’s people. That is why, five years
ago, we worked hard to make Wall Street Reform the law of the land, and that is
why, today, tomorrow, and far into the future, we will work hard to keep this
law strong, both in statute and in practice.