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November 13, 2007 Under Secretary for Domestic Finance Washington - Thank you very much. Peter, thank you for that introduction and to everyone gathered here today, thank you for welcoming me. It is a privilege to be here today at the American Enterprise Institute (AEI). AEI has played a key role in policy-making for over sixty years, welcoming many of our most respected public servants as scholars and fellows, such as Peter, who served as General Counsel at the Treasury Department from 1981 to 1985 and White House Counsel to the President during 1986 and 1987. These esteemed scholars and fellows have strengthened and consistently reaffirmed AEI's mission to "defend the principles and improve the institutions of American freedom and democratic capitalism." The Administration, the Treasury Department, and Secretary Paulson share these objectives, which are reflected in their willingness to explore reform of the regulatory structure related to financial institutions, also the subject of today's panel discussions. Private-sector financial institutions are some of the more nimble and critical contributors to this core AEI mission, to the spread of democratic capitalism. Such institutions serve as a catalyst for economic growth in the Recognizing the need to maintain and enhance these institutions' competitiveness so as to fulfill this mission in an increasingly global environment, this past June Secretary Paulson announced that the Treasury Department would undertake a comprehensive review of the regulatory structure surrounding these institutions as part of a broader initiative focused on Today, let me first explore the genesis of this initiative and then our plan for the regulatory blueprint project. Globalization's Impact on Competitiveness Upon arriving at the Treasury Department in July 2006, Secretary Paulson immediately focused on enhancing the competitiveness of He chose to deliver his first speech as Secretary, not here in At that time, he pointed out, "the challenge before us now is how to achieve the right regulatory balance to allow us to be competitive in today's world while guarding against the recurrence of past abuses." In other words, our task is to maintain At approximately the same time of the Secretary's arrival at the Treasury Department, the financial community actively began to debate the causes of the decline in the In addition to dollar volume, other IPO statistics also indicate this globalizing trend: Many foreign economies have been rapidly transforming to market-based economies. Of the largest 20 IPOs in 2006, 19 were foreign companies listing in foreign jurisdictions, five of which were privatizations of Chinese state-owned companies listing in Hong Kong or Ninety percent of the companies going public in 2006 listed on their domestic exchanges. The number of global IPOs more than doubled from 839 in 2002 to 1729 in 2006 (with just over 10 percent listing in the Although IPOs have become an often-referenced benchmark of capital markets competitiveness, to my mind focusing solely on that measurement is overly simplistic. Instead, we should look broadly at measures that gauge our ability to foster human capital, encourage innovation, and reward efficiency. As these conditions are met, we will continue to excel in areas such as: asset management; alternative asset management vehicles, such as hedge funds, venture capital, and private equity; technology; mergers and acquisitions; trading and execution models; and listed and unlisted derivatives. By most of these measurements we remain the uncontested leader. Yet, the Another figure might also demonstrate the continuing The Our regulatory system has adapted to market events by expanding (sometimes in crisis moments) rather than aiming for the broader objectives of market stability, consumer and investor protection, and cost-effectiveness. This creates a difficult environment for both regulators and regulated. Regulators must find ways to balance appropriately these matters. Regulatory Blueprint and the Rate of Innovation After reflecting on these issues and hearing from investors, market participants, and public policy experts at a Treasury-hosted conference on U.S. capital markets competitiveness last spring, Secretary Paulson asked the Treasury Department to undertake a comprehensive review of the regulatory structure surrounding financial institutions and develop recommendations to modernize the U.S. regulatory system. The goal of this regulatory blueprint is to improve the effectiveness of the regulatory structure relating to financial institutions, to find the "right regulatory balance…marry[ing] high standards of integrity and accountability with a strong foundation for innovation, growth, and competitiveness." The Treasury Department will approach its review of the current financial services regulatory structure holistically, taking into account all financial services industry participants including insurance, securities, and futures firms, in addition to depository institutions, upon which most past Treasury Department studies have focused. One of the great challenges in undertaking this project will be to find a regulatory system ensuring consumer and investor protection and market stability and adaptive to the accelerating rate of innovation and complexity in the financial services industry. Having spent 30 years in the financial services industry prior to my appointment as Under Secretary for Domestic Finance, I witnessed considerable innovation in the capital markets. But, it was really my last few years in the financial services industry that this change accelerated at a nearly mesmerizing pace. When I began my career in the securities industry, technology was an infrequently-discussed skill or asset, thought of only as a processing tool. The capital markets were characterized by a nationalistic perspective and innovative vehicles, such as derivatives, were just appearing. Compare that with today when the skilled technologist is a key actor in the industry, markets are global--operating 24/7 without boundaries--, and innovation is a skill required for success. Technological developments have led to innovations in financial products and forever changed information flow. As a result, some have suggested the world has flattened; it has, at the very least, become more compressed. And, this compression will only increase with the passage of time. This past summer, I heard current AEI fellow and accomplished public servant, Newt Gingrich, discuss this rate of change in terms of science. "In scientific knowledge and advancement, we are experiencing today a rate of change that is four times greater than what we did during the last 25 years--making the scale of change we will experience in the 25 year period 2006-2031 at least equivalent to what we experienced in the 100 year period 1906-2006." I would posit that the financial services industry will experience similar accelerating rates of change. In my final five years in the financial services industry I saw as much innovation as I saw in my first 25 years. At the same time, financial innovation and complexity, propelled forward by globalization, will increasingly expose existing fissures and gaps as well as obstructions and inefficiencies in our regulatory system. What does this mean for policymakers? What does this mean for the Treasury Department's blueprint? We must work to find a regulatory system that fills these fissures and gaps, removes these obstructions, and nimbly allows for adaptation to innovation and complexity. To inform our work on the regulatory blueprint, the Treasury Department published a Federal Register notice last month seeking public comment on a number of topics impacting the regulation of financial institutions, including overlapping state and federal regulation, consumer and investor protection, and the strengths and weaknesses of having multiple regulators and multiple federal charters. The Federal Register notice also includes a section of general questions to enable consideration from a broad and integrated perspective, including questions regarding functional regulation, overall risk to the financial system, principles-based and rules-based regulation, and macro-level regulatory structure models. These matters should be very familiar to many of you in this audience. The Report of the Financial Services Roundtable's Blue Ribbon Commission on Competitiveness, the subject of the panels that have preceded and will follow my remarks, addresses several of these issues. Let me commend the Financial Services Roundtable and the Co-Chairs of the Roundtable's Commission on Enhancing Competitiveness, Richard M. Kovacevich and James Dimon, for their important work in this area, which will inform the debate as the Treasury Department moves forward. In past speeches, the Treasury Department has highlighted several issues that the Roundtable's Report considers, including the need for finding an appropriate balance between rules-based and principles-based regulation, enhancing the dialogue between the regulator and the regulated, and a continual and comprehensive regulatory cost-effectiveness analysis. The Treasury Department recognizes the urgency of updating The reports and analysis of private sector organizations, such as the Financial Services Roundtable, reaffirm this sense of urgency. In the past, the Conclusion I mentioned at the beginning of my remarks that Secretary Paulson chose the setting of I am delivering these remarks in Thank you.
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