On April 19, 2011, Deputy Secretary Neal S. Wolin delivered a prepared statement to address the critics of the Dodd-Frank Act. The comments were so hard hitting I dare not change the tenor of what Mr. Wolin so aptly conveyed. It is rather long but worth the read. Here is a guy who is tired of hearing rhetoric and tired of individuals having a short memory. 10 and out Mr. Wolin.
Speaking about the fiscal crisis of 2008, “There was no alternative to reform. Not only our economy but also the lives and livelihoods of tens of millions of American families were devastated by the crisis. And it was manifestly clear that the financial system that led us to the edge of the abyss was broken and needed to be fixed.
The system we had favored short-term gains for individual firms over the stability and growth of the economy as a whole. The system we had was weak and susceptible to crisis. And the system we had left taxpayers to save it in times of trouble.
The Dodd-Frank Act creates a comprehensive and robust regulatory framework. The statute creates a structure for the government to monitor and respond to systemic risk. It makes clear that no firm will be considered “too big to fail.” It requires regulators to impose heightened prudential standards on large, interconnected financial firms. It provides for the comprehensive regulation of the derivatives markets for the first time. And the statute establishes a single agency dedicated to protecting consumers.
For the past nine months, regulators have been hard at work implementing these and many other critical reforms contained in Dodd-Frank.
Yet today, even as millions of Americans are still recovering from the crisis, some on Wall Street, K Street, and Capitol Hill seek to slow down, roll back, or even repeal these crucial reforms.
I want to address these criticisms one by one.
First, the pace of reform.
After the Dodd-Frank Act was signed into law last summer, many in Washington and in the financial services industry said that the legislation lacked details, and that the uncertainty of the shape of final regulations made it difficult for businesses to plan for the future. They called for clarity, and they wanted it fast.
We said that regulators would move quickly but carefully to implement the legislation. We said that we would seek public input. We said it’s critical to get the details right.
Recently, some of these very same critics – those who previously demanded clarity as quickly as possible – are saying that we’re moving too quickly. They now suggest that too many details are coming too fast. They say that regulators aren’t setting aside sufficient time to study the issues and make the right decisions, and that businesses won’t have time to adjust to the new regulations.
Although there may be reasonable debate about the substance of Dodd-Frank implementation work, there is no question that regulators have been implementing the statute in a careful, considered, and serious manner.
The second criticism is that implementation of the law is uncoordinated.
Our financial regulatory system is built on the independence of regulators, and given the importance of Dodd-Frank implementation, independent regulators will have different views on complicated issues – working through differences is an important part of getting the substance right.
At the same time, Dodd-Frank forces regulators, more than ever before, to work together to close gaps in regulation and to prevent breakdowns in coordination – this is a central change brought about by the law. Beyond joint rules and consultation required on specific rulemakings, we have been and will continue working together where issues cut across multiple agencies, to make the pieces of reform fit together in a sensible, coherent way.
The Financial Stability Oversight Council, which is a key component of Dodd-Frank, has a mandate to coordinate across agencies and instill joint accountability for the strength of the financial system. Already, we have worked through the FSOC to develop an integrated roadmap for implementation, to coordinate an unprecedented six-agency proposal on risk retention, and to develop unanimous support for recommendations on implementing the Volcker Rule. As Chair of the FSOC, Treasury will continue to make it a top priority that the work of the regulators is well-coordinated.
Third, critics claim that reforms to the derivatives markets will harm liquidity and inhibit effective allocation of capital.
Regulation of the over–the-counter derivatives markets is a critical element of the Dodd-Frank Act. The financial crisis demonstrated that without adequate transparency and capital reserves, derivatives can allow hidden risks to build and leave counterparties without sufficient buffers to sustain losses.
The critics argue that requiring standardized contracts to be traded on open, transparent markets will harm liquidity. This position ignores the history and the basic structure of our financial system. The equities market, where stocks are traded publicly and price information is readily available, is one of the most liquid markets in the world – because of, not in spite of, transparency.
Increased transparency in the derivatives markets will tighten spreads, reduce costs, and increase understanding of risks for market participants. Now, a transparent structure like this might not improve the bottom line of certain market participants – but it promotes efficient markets, capital formation, and growth in the broader economy, while reducing the risk and potential costs of another destabilizing financial crisis.
Critics also say that margin requirements for derivatives tie up capital unnecessarily, diverting it away from investments that promote economic growth.
Requiring the largest participants and dealers in derivatives markets to hold capital and margin is critical to improving the resilience of the financial system. The margin requirements for financial entities are, then – like derivatives themselves – a “risk-management tool,” serving as important bulwark against losses infecting the system and contributing to another crisis.
Fourth, critics say that unless we achieve harmonized policies across borders, we should hold off or go slow on moving forward with Dodd-Frank, lest there be an unlevel playing field internationally. They also argue that if our reforms are too strong or different, U.S. firms will not be able to compete on a global scale.
I disagree. We have already enacted comprehensive legislation, and others are now putting their legal and regulatory frameworks in place. We are working hard at the international level to make sure that others put in place similar frameworks on the key issues where international consistency is essential – such as OTC derivatives, liquidity, leverage, and capital.
Now, it’s true that the devil lies in the details, and that when different jurisdictions implement commonly-agreed-to international principles, problems and disagreements may arise. That is why in addition to our work in international fora like the G-20 and the Financial Stability Board, we work every day with our foreign counterparts, especially in Europe, through our financial market and regulatory dialogue.
But as we work in the international sphere to promote a level playing field, we must not fail to implement our reforms at home. Ultimately, if we fail to do what is necessary to reform and protect our system, we put at risk its fundamental strength and resilience.
Critics don’t want to hear any of this. They simply say if our financial system is different from our partners, U.S. firms won’t be able to compete. It’s not a credible argument, because our systems have never been identical, and they never will be.
A great deal of their criticism is focused on enhanced capital requirements.
More and higher-quality capital, especially at the biggest and most interconnected financial institutions, is essential to providing better buffers against shock. Indeed, as the international community has recognized, the lack of such buffers was a core problem in the crisis we’ve just experienced. Implementation of Dodd-Frank and the work of the Basel Committee are critical to ensuring that firms are better insulated from stress.
We believe, of course, that it’s important to strike the right balance. We need a capital regime that strengthens firms so that they can withstand stress, but also one that allows U.S. firms to compete effectively on a global basis.
Detailed rules about capital requirements and other aspects of financial regulation will always vary among sovereign nations. What’s important, what we have made good progress on – and what we are committed to – is closing regulatory gaps, ending opportunities for geographic arbitrage, and preventing a global race to the bottom.
Fifth, critics suggest that the Consumer Financial Protection Bureau will stifle consumer choice and innovation, or interfere with the role of existing regulators. And they also claim that the agency isn’t accountable.
Rather than limiting choice, the CFPB will be essential to creating real choice for consumers. The system we had before allowed lenders to hide the true costs of financial products in hidden fees and interest rate changes. Consumers often didn’t get the information they needed to understand the loan they were taking out or the credit card agreement they were signing. That’s not choice.
Real choice is about having the information to make the right decisions. The CFPB’s job is to deter deceptive and abusive practices, promote clear disclosure, and help consumers get the information they need. With that information, consumers will have real choice – they will be able to understand what products and services are best for them and to make fully informed financial decisions.
And as consumers begin to make more informed financial decisions, it will raise the bar for the products and services offered to them. More empowered consumers will motivate the financial sector to offer new and better options. Rather than stifling innovation, the CFPB will catalyze it.
I want to emphasize that the CFPB’s mission – helping consumers get good information and cracking down on deceptive and abusive practices – in no way interferes with the role of prudential regulators. What we had before – a patchwork system where too many agencies were responsible for consumer protection, but none of them actually focused on it – that system simply didn’t work.
The existence of the CFPB allows prudential regulators to focus on their core tasks – making sure that banks have the capital, the liquidity, and the risk-management tools to ensure safety and soundness in the system. It allows the CFPB to focus on its own single task – to make sure that consumer financial products are offered in a fair, transparent, and competitive way.
