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February 4, 2010 Thursday 10:28 AM EST
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HEADLINE: DEPUTY SECRETARY OF THE TREASURY S. WOLIN ISSUES STATEMENT ON PROHIBITING CERTAIN HIGH-RISK INVESTMENT ACTIVITIES BY BANKS, BANK HOLDING COMPANIES
WASHINGTON, Feb. 2 — The Senate Banking, Housing & Urban Affairs Committee issued the following statement from a committee hearing:
Statement of Neal S. Wolin
Deputy Secretary of the Treasury
Committee on Banking, Housing, and Urban Affairs
United States Senate
Chairman Dodd, Ranking Member Shelby, thank you for the opportunity to testify before your committee today about financial reform – and in particular about the Administration’s recent proposals to prohibit certain risky financial activities at banks and bank holding companies and to prevent excessive concentration in the financial sector.
The recent proposals complement the much broader set of reforms proposed by the Administration in June, passed by the House in December, and currently under consideration by this committee. We have worked closely with you and with your staffs over the past year, and we look forward to working with you to incorporate these additional proposals into comprehensive legislation.
Sixteen months from the height of the worst financial crisis in generations, no one should doubt the urgent need for financial reform. Our regulatory system is outdated and ineffective, and the weaknesses that contributed to the crisis still persist. Through a series of extraordinary actions over the last year and a half, we have made significant progress in stabilizing the financial system and putting our economy back on the path to growth. But the progress of recovery does not diminish the urgency of the task at hand. Indeed, our financial system will not be truly stable, and our recovery will not be complete, until we establish clear new rules of the road for the financial sector.
The goals of financial reform are simple: to make the markets for consumers and investors fair and efficient; to lay the foundation for a safer, more stable financial system, less prone to panic and crisis; to safeguard American taxpayers from bearing risks that ought to be borne by shareholders and creditors; and to end, once and for all, the dangerous perception any financial institution is “Too Big to Fail.”
The ingredients of financial reform are clear:
All large and interconnected financial firms, regardless of their legal form, must be subject to strong, consolidated supervision at the federal level. The idea that investment banks like Bear Stearns or Lehman Brothers or other major financial firms could escape consolidated federal supervision should be considered unthinkable from now on.
The days when being large and substantially interconnected could be cost-free – let alone carry implicit subsidies – should be over. The largest, most interconnected firms should face significantly higher capital and liquidity requirements. Those requirements should be set at levels that compel the major financial firms to pay for the additional costs that they impose on the financial system, and give such firms positive incentives to reduce their size, risk profile, and interconnectedness.
The core infrastructure of the financial markets must be strengthened. Critical payment, clearing, and settlement systems, as well as the derivatives and securitization markets, must be subject to thorough, consistent regulation to improve transparency, and to reduce bilateral counterparty credit risk among our major financial firms. We should never again face a situation – so devastating in the case of AIG – where a virtually unregulated major player can impose risks on the entire system.
The government must have robust authority to unwind a failing major financial firm in an orderly manner – imposing losses on shareholders, managers, and creditors, but protecting the broader system and ensuring that taxpayers are not forced to pay the bill.
The government must have appropriately constrained tools to provide liquidity to healthy parts of the financial sector in a crisis, in order to make the system safe for failure.
And we must have a strong, accountable consumer financial protection agency to set and enforce clear rules of the road for providers of financial services – to ensure that customers have the information they need to make fully informed financial decisions.
Throughout the financial reform process, the Administration has worked with Congress on reforms that will provide positive incentives for firms to shrink and to reduce their risk and to give regulators greater authorities to force such outcomes. The Administration’s White Paper, released last June, emphasized the need to give regulators extensive authority to limit risky, destabilizing activities by financial firms. We worked closely with Chairman Frank and subcommittee Chairman Kanjorski in the House Financial Services Committee to give regulators explicit authority to require a firm to cease activities or divest businesses that could threaten the safety of the firm or the stability of the financial system.
In addition, through tougher supervision, higher capital and liquidity requirements, the requirement that large firms develop and maintain rapid resolution plans – also known as “living wills” – and the financial recovery fee which the President proposed at the beginning of January, we have sought indirectly to constrain the growth of large, complex financial firms.
As we have continued our ongoing dialogue, within the Administration and with outside advisors such as the Chairman of the President’s Economic Recovery Advisory Board, former Federal Reserve Chairman Paul Volcker, whose counsel has been of tremendous value, we have come to the conclusion that further steps are needed: that rather than merely authorize regulators to take action, we should impose mandatory limits on proprietary trading by banks and bank holding companies, and related restrictions on owning or sponsoring hedge funds or private equity funds, as well as on the concentration of liabilities in the financial system. These two additional reforms represent a natural – and important – extension of the reforms already proposed.
Rest of document can be viewed at http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=2ecf6bfb-4b19-47b6-a223-abbc35592140For more information please contact: Sarabjit Jagirdar, Email:- email@example.com
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