7.24.2009 Treasury Secretary Timothy Geithner began his testimony before the House Financial Services Committee by stating that the U.S. financial system failed in its most basic responsibility to be stable and resilient enough to provide credit while protecting consumers and investors; the regulatory regime permitted an excessive build-up of leverage; and the system was too weak to withstand the failure of major financial institutions. The Secretary stated that the reforms proposed by President Obama are necessary, and they would substantially alter the ability of financial institutions to escape regulation, to choose which regulator suits them best, to shape the content of future regulation and to continue the financial practices that were lucrative for parts of the industry for a time. Because detailed legislative language has been released in recent weeks, Geithner focused on the key priorities for reform and how they may be accomplished:

  • Consumer Protection: Requiring oversight of all financial firms, whether banks or non-banks; consolidating oversight to enhance the consistency of regulations applicable to firms; examining how products affect consumers, not institutions; and giving a new agency broad powers from writing legislation to enforcing it.
  • Financial Stability: Increasing capital requirements; evolving the Federal Reserve’s (the Fed’s) authority to create a single point of accountability for the consolidated supervision of all large, interconnected firms whose failure could threaten the stability of the system, regardless of whether they own an insured depository institution; transferring the Fed’s consumer protection responsibility to the consolidated supervisory agency and requiring the Fed to receive written approval from the Secretary of the Treasury before exercising its emergency lending authority; and creating a Financial Services Oversight Council to bring together the heads of all of the major federal financial regulatory agencies and improve coordination of policy and resolution of disputes among the agencies.
  • Market Oversight: Reforming regulation of the derivative market; requiring securitization sponsors to retain 5% of the credit risk of securitized exposures; requiring transparency of loan level data and standardization of data formats to better enable investor due diligence and market discipline; and, with respect to credit rating agencies, ending the practice of allowing them to provide consulting services to the same companies they rate, requiring these agencies to differentiate between structure and other products, and requiring disclosure of any “ratings shopping” by issuers.
  • Crisis Resolution: Creating a new resolution authority for financial firms whose disorderly failure would threaten the stability of the financial system; and requiring the biggest firms to prepare, continuously update, and periodically provide to regulators a credible plan for their rapid resolution in the event of severe financial distress.
  • Level Playing Field Internationally: Raising international regulatory standards and improving international cooperation; requiring international banking regulators to be responsible for setting capital requirements and reforming capital ratios to more effectively constrain leverage in the future; and calling on the international banking regulators to develop proposals for countries to have the necessary tools to quickly resolve failures of cross-border financial firms.

Click http://www.ustreas.gov/press/releases/tg231.htm to access Secretary Geithner’s testimony.