As prepared for delivery
YORK – Good
afternoon. It is a privilege to address
the International Section of the American Bar Association, and to be speaking
about international regulatory reform. The subject matter is particularly
timely given that the world’s finance ministers will gather in Washington, D.C.
for the G-20 this weekend.
We have learned from recent events, including the financial
crisis, that financial systems and markets around the world are more integrated
than ever. Therefore, financial reforms
around the globe must be consistent and convergent.
I will touch on three key
priorities that were agreed upon by the G-20 – capital, resolution, and OTC
derivatives – as well as insurance regulation.
We are transitioning now from regulatory design to
implementation. We must acknowledge that
the task is both difficult and complex. We must work together through
the G-20 and the Financial Stability Board to make the new rules effective. We all share a
common interest in a global financial system that is safe and resilient, and that
The Importance of Reform
Let me begin by retreading familiar ground: the
financial crisis revealed that the risks facing our system can be correlated
and crosscutting, and that they can affect multiple firms, markets, and
countries simultaneously. The crisis laid bare the fundamental weaknesses of
the previous financial regulatory infrastructure.
To preserve financial stability, it
became essential to establish a regulatory structure that could properly assess
the financial system as a whole, not simply its component parts – a regulatory
structure in which the failure of one firm, or problems in one corner of the
system, would not risk bringing down the entire financial system. It was important to establish a modern regulatory framework
that could keep pace with financial sector innovations, restore market
discipline, and safeguard financial stability in both the United States and
abroad. The United States has
played a leading role in this global financial reform by enacting the
Some have argued that these new
rules and standards put U.S. financial firms at a competitive disadvantage. While we must always work towards having a
level competitive playing field, I believe such arguments are misplaced.
First, by moving quickly, we in the
United States have been able to lead from a position of strength in setting the
international reform agenda.
Second, there is already evidence
that our actions – both the immediate response to the crisis and permanent
reforms under the Dodd-Frank Act – have bolstered the recovery of the U.S.
financial system. Bank balance sheets
are stronger. Tier 1
common equity at large bank holding companies has increased by more than 70
percent or by $560 billion since the first quarter of 2009.
Additionally, at the
four largest bank holding companies, for example, reliance on short-term
wholesale financial debt has decreased from a peak of 36 percent of total
assets in 2007 to 20 percent at the end of 2011. The firms’ liquidity
positions are more robust and their funding sources are more reliable. Firms
have significantly reduced leverage. Recent stress tests showed that the bank
holding companies are better able to withstand significant shocks.
Third, I believe that consumers,
investors, and businesses feel more secure when they deal with financial
institutions that are well-regulated and transparent, because these attributes
engender trust. Trust
is essential for the financial system to perform its most basic functions,
including credit intermediation. For many years, investors from all over the world have
trusted the U.S. financial system. Regulation that is both strong and sensible
is essential to continue that trust.
Over the past three years, we have
made substantial progress in restoring this trust to our financial system and thereby
improving financial stability. Long-term economic growth and credit
intermediation are only sustainable under a model in which there is confidence
in financial stability.
All of this being said, it is
nevertheless important to remember that financial systems are interconnected
and that risks both
transcend and migrate across national borders. Therefore, we must work towards
building a system where there is broad global agreement on the basic
rules of the road.
Global coordination is important not only for
maintaining a level playing field, but also for promoting financial
stability. We can ill afford the risk of regulatory
arbitrage. If riskier activities migrate
unchecked to jurisdictions with inadequate rules and supervision, the threats
that will emerge will have implications not just for the host country, but for
the global financial system. The financial crisis exposed the failure of weak
Europe has taken important steps
toward reform. The EU is working through
its most extensive financial services reform. It has
proposed or adopted around thirty reform measures, including almost all of the
key measures agreed to by the G-20. The
United States and the EU are aligned on the fundamental goals of regulatory
reform, and are united by a shared view that it is necessary to complete at an
international level the work that is underway. Treasury and U.S. regulatory agencies have worked
closely with our counterparts in the European Commission and the European
Supervisory Agencies to align our regulations more closely.
It is unlikely that we and our European counterparts will
attain perfect alignment. But most of the differences between us
are technical, not matters of principle.
While we must work diligently to resolve our technical differences, we
should not let them overshadow our shared commitment to reform. We must also see
to it that other regions follow through on implementing reforms, particularly
Asia, given the importance of financial centers like Hong Kong, Singapore, and
Tokyo. The global
financial system will continue to strengthen as a result of our efforts. Backtracking
on reforms is not an option.
G-20 and the Joint Reform Agenda
The G-20 has been, and will
continue to be, a key vehicle for coordinating our reform efforts. Since the
first meetings of the G‑20, and especially since the Pittsburgh meetings during
the height of the financial crisis in 2009, the Group has worked to increase
the strength and effectiveness of the international regulatory framework
through a comprehensive agenda for reform. This agenda has been reaffirmed and further
developed at each subsequent Summit. The
Financial Stability Forum, which was expanded and strengthened as the Financial
Stability Board (FSB) in 2009, has also played a key role in this process, with
support from the global standard-setting bodies.
This year in the G-20, the United
States is emphasizing progress on implementation in three key areas: capital,
resolution, and OTC derivatives. Let me
now turn to discussing these three priorities as well as international
coordination around insurance, which will also be an area of focus in the
The crisis showed that financial
institutions were not sufficiently capitalized to withstand significant market
pressures. To maintain financial
stability, taxpayers in countries across the globe had to provide capital support
to financial institutions in order to prevent their failure. There was little question that, going
forward, banks needed to be more resilient, with better quality capital
The international regulatory
community acted with dispatch and urgency to achieve consensus on Basel 2.5 and
Basel III capital standards. The new Basel
capital standards provide a uniform definition of capital across jurisdictions,
and it requires banks to hold significantly more and higher-quality capital. The reforms to the Basel Capital Standards also
establish a mandatory leverage ratio and a liquidity coverage ratio.
More work remains with
respect to the Basel Capital Standards.
International agreement on standards must be followed with
implementation by G-20 members.
Moreover, important debates continue around issues such as liquidity run-off
ratios and measurement of capital deductions. The Basel Committee is now
working toward more consistent measurement of risk-weighted assets across
While these points are
relatively technical, it is important that the new rules be consistent not only
in principle, but also in practice. Consistent cross-border application
of capital standards is important to maintaining a level playing field.
resolution regimes is complicated. But it
is a critically important topic.
The U.S. experience with Lehman Brothers showed the potentially
devastating consequences to financial stability of the disorderly bankruptcy of
a financial firm. Thus, the Dodd-Frank Act provides for orderly resolution of
financial companies, including non-bank financial institutions. The FDIC
and Federal Reserve have already adopted a number of rules pursuant to these
new authorities, including a “living wills” rule that requires large bank holding
companies and designated nonbank financial companies to prepare resolution
plans. The largest bank holding
companies will submit the first living wills in July.
The goal of international
convergence was furthered this year when the G-20 endorsed the “Key Attributes of Effective
Resolution Regimes for Financial Institutions.” This
new international standard addresses such critical issues as the scope
and independence of the resolution authority, the essential powers and
authorities that a resolution authority must possess, and how jurisdictions can
facilitate cross-border cooperation in resolutions of significant financial
institutions. The Key Attributes provide guidelines for how jurisdictions
should develop recovery and resolution plans for specific institutions and for
assessing the resolvability of their institutions. This
new international standard also sets forth the elements that countries should
include in their resolution regimes while avoiding severe systemic consequences
or taxpayer loss.
Therefore, much progress has already
been made and even more will be completed by the end of this year: cross-border
crisis management groups for the largest firms have been established, additional
cross-border cooperation agreements will be put in place, and recovery and
resolution plans are being developed.
The crisis also showed that we did not have a sufficient
understanding of derivatives, which are an important means of interconnection
between firms. The flaws attendant to
this area of financial transactions were many: poor access to useful data such
that, at critical times, neither supervisors nor counterparties knew who owed
what to whom; poor risk management such that firms were not able to satisfy
their contractual obligations with respect to collateral; and a generally
fragmented and opaque market. It is common ground that the lack of oversight in
the derivatives markets exacerbated the financial crisis.
The Dodd-Frank Act creates a comprehensive
framework of regulation for the OTC derivatives markets. The elements of this framework include
regulation of dealers, mandatory clearing, trading, and transparency. The framework established under the
Dodd-Frank Act is consistent with that of the G-20. The CFTC and SEC are
well into their rule-making process. Once again, the United States and the
EU have closely cooperated in this area, and have adopted parallel approaches
to important issues such as central clearing, trading platforms, and reporting
to trade repositories.
While the reforms set forth a
framework for on-exchange-traded derivatives, it is also important for us to
make progress on establishing a global regime for margin for bespoke, un-cleared
derivatives transactions. Both the United
States and the EU support international work on global margin standards for
trades that are not cleared through a central counterparty. Margin
requirements are critical to promoting the safety and soundness of the dealers,
and thereby lower risk in the financial system.
While we have made some
progress, there is still much work to be done on derivatives, including
completing the implementation efforts and meeting agreed
Finally, I would like to turn to
insurance regulation. Important strides
have been made in this area. The Dodd-Frank Act created and placed within the
Treasury Department the Federal Insurance Office (FIO). While FIO is not a
regulator, it has broad responsibilities to monitor all aspects of the
insurance industry and is the first federal office in this sector. Among its
duties, FIO is charged with coordinating federal efforts and developing federal
policy on prudential aspects of international insurance matters, including
representing the United States in the International Association of Insurance
Supervisors, or IAIS. Notably, FIO recently joined the Executive Committee of
FIO’s establishment coincides with
the rapid internationalization of the insurance sector and work ongoing in
various international regulatory bodies that will affect U.S.-based companies
operating around the world. FIO’s international priorities include the IAIS
initiative to create a common framework for the supervision of internationally
active insurance groups, or ComFrame. FIO is also engaged in the IAIS work
stream to develop a methodology that will identify globally significant
insurance institutions, an assignment given to the IAIS by the Financial
Stability Board. Finally, FIO is leading an insurance dialogue between the
United States and the EU that aims to establish a platform for insurers based
on both sides of the Atlantic to compete fairly and on a level playing field.
We must continue to work with our
partners in the G-20 and the Financial Stability Board to ensure a consistent
international financial reform agenda. It is not enough to mitigate risk within the
United States. Reform must be global in
But, financial reform cannot just
respond to events of the past. It must
be forward-looking and it must help lay the foundations for sustainable growth.
Financial reform, embodied by
responsible and robust regulation, is critical to establishing and maintaining
confidence. Confidence is critical for
long-term financial stability and growth.
Our past experience confirms our
current judgment. In the decades
following the Great Depression, the United States set the highest standards for
disclosure and investor protection, the strongest protections for depositors,
and sophisticated market rules. We did not lower our standards even when others
might have. Financial regulation became
a source of strength for our financial system and led to a period of significant
growth and prosperity.
Today, as our predecessors did in
the wake of the Great Depression, we also have the opportunity to restore trust
in the global financial system through a smart regulatory framework that could
support sustainable economic expansion.