Today, Treasury Secretary Timothy Geithner testified before the House Financial Services Committee on the Obama Administration's proposals for financial regulatory reform. Chairman Barney Frank (D-MA) introduced the hearing by insisting that "media reports" that regulatory restructuring "is dead for the year are inaccurate," and that legislative hearings on the various regulatory restructuring proposals will begin next week. Chairman Frank also addressed the ongoing concern about regulating those institutions that are "too big to fail," stating that, although there is "no magic bullet" to resolve this problem, the Committee intends to put forth legislation to "substantially diminish this problem" and implement a "mechanism" for putting the concern of the failure of nonbank financial institutions "out of everyone's misery."

Several other members of the Committee addressed the overarching "need for reform" and the additional concerns that have been brewing over the past year, as noted by Rep. Luis Gutierrez's (D-IL) suggestion for increased capital requirements for financial institutions, avoiding predatory lending and the "importance" of creating the Consumer Financial Protection Agency (CFPA), as well as Rep. Jeb Hensarling's (R-TX) staunch suggestion to "end all taxpayer bailouts." During testimony, Secretary Geithner stated that “As some normalcy returns to our financial system and our economy, we cannot let it be cause for complacency,” and focused his remarks on two main challenges to creating a "more stable system":

  • Achieving the right balance between consumer protection reform and fostering competition- There is a need for a "dedicated, consolidated consumer protection agency" to enforce "strong minimal standards" with "consequences for firms that engage in unfair consumer practices," as the existing consumer protection system "failed to protect consumers from unexpected risks" and "failed to set clear rules of the road for sustainable innovation to thrive." To achieve these objectives, a "fundamental overhaul," is necessary, including "consolidating the fragmented and scattered authorities now spread across the federal government." However, the focus should be on "smarter regulation" and creating "stronger standards," without limiting consumer choice or "stifling innovation, growth and prosperity." In response to Rep. Michael Castle's (R-DE) concern that the CFPA would be an "activist agency" that would restrict or hinder certain normal bank practices, Secretary Geithner stated that the CFPA should not exercise "too much unbridled authority," and that pursuant to the proposed legislation, the CFPA "will be structured to be independent and accountable" including being governed by a separate board of regulators.
  • Moral hazard risk of "too big to fail" - The framework for supervision and regulation of large, highly leveraged and substantially interconnected financial firms is "profoundly inadequate." Addressing the threats to financial stability posed by such firms is "central to the Administration’s financial regulatory reforms." Secretary Geithner stated that first, firms cannot "reap the benefits of explicit or implicit government subsidies without very strong government oversight," and the financial system cannot function if there is an impression that firms will always "be protected" if they fail. Second, the Administration intends to impose "tougher rules" on the largest, most leveraged, and most interconnected firms, including raising capital and liquidity requirements, raising capital charges on exposures between financial firms, and comprehensively regulating the over-the-counter derivative markets. Finally, the proposed legislation would provide the government with the authority, as it has now for banks and thrifts, but not holding companies, to unwind major financial firms "that pose the biggest risk" in an orderly fashion "without taxpayers assuming the burden" and with less overall collateral damage to the system.

Secretary Geithner stated that it is "realistic" to have reform completed over the next few weeks, but that is "a choice" Congress has to make.