FROM THE OFFICE OF PUBLIC AFFAIRS

March 9, 2004
JS-1225

Treasury Secretary John Snow Remarks to America’s Community Bankers Association Government Affairs Conference March 9, 2004

Thank you so much for having me here today.

It’s great to be with a group of lenders who are doing so much for your communities and for our country.

We are in the midst of an economic recovery, and access to capital for things like homeownership and small business start-ups or expansions is critical. You are playing such an important role in economic growth, and I want to thank you for that.

The economic indicators show that your dedication to serving your customers – combined with President Bush’s tax cuts – is working.

Homeownership is up – nearly 70 percent of Americans own their own homes today, and that’s a record – unemployment is heading down, and GDP growth has been strong.

The President’s tax cuts provided the stimulus that was necessary to turn our economic ship around… and they are now encouraging and allowing for the economic growth that is continuing into the future.

• Economic growth in the second half of 2003 was the fastest since 1984;
• New home construction was the highest in almost 20 years;
• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;
• And we are seeing steady – too slow, but steady – job growth.

These economic indicators all point to the same conclusion: economic growth is robust and will be sustained.

Now, we need more jobs.

They’re likely to come from the small-business sector… and those are your customers!

That’s why we’ve got to make the tax cuts permanent… we can’t raise taxes on small business at this critical time. They create three out of four net new jobs.

I know you’re working with us to keep small business strong.

You’re also working with us to protect people from identity theft, and to protect America from terrorists by identifying and cutting off their blood money.

Last year at this time, we were talking about renewing the Fair Credit Reporting Act… and today we’re celebrating it. The work you did to show Congress the importance of our nation’s credit reporting system was invaluable.

Thanks to your help on that legislation last year, information to protect consumers can move faster than identity thieves.

FCRA makes our credit market more robust and available for more Americans, for people who had never been able to get a mortgage before, for young people to finance their education, to welcome people into the financial mainstream out of the reach of the loan sharks… so there is much to celebrate about renewing those national standards.

You’re protecting your customers against identity thieves, and you’re also helping protect America against terrorists. So I want to talk first today about the efforts we are making in partnership to protect America from those who want to harm us.

Out of the horror of September 11th, 2001, came a tremendous resolve in the financial community to cut off the terrorists’ lifeblood: their money.

Institutions large and small have committed themselves to the task.

America’s community banks have done everything that the Treasury Department has asked of you during this fight, and I want to personally thank you for your efforts.

Your compliance with Section 314 of the Patriot Act – which requires everyone to share information – has been exemplary.

Under our 314 process, law enforcement provides the names of suspected terrorists or significant money launderers to Treasury’s Financial Crimes Enforcement Network (FinCEN), which scrubs the names and, if appropriate, sends them on to you. We’ve asked that you then search your recent account and transaction records for potential matches, and report them back to FinCEN.

You’ve done it, and our country is safer because of it.

We understand that the 314 process is an extraordinary tool… it is one that provides law enforcement with valuable leads to follow the money trail. And without your help it would be useless.

We’ve also asked you to establish risk-based procedures to verify the identity of your customers who open accounts, pursuant to section 326 of the Patriot Act. While we insist that you form a reasonable belief as to the customer’s identity, we have also worked hard to ensure that the regulation give you the flexibility to decide which forms of identification works best for you in your communities to verify customer identity. This reflects our judgment that you are in the best position to make such decisions. We believe this flexibility enhances the effectiveness of this regulation.

And we’re always looking for ways to provide you with more and better guidance concerning FinCEN’s regulations. This is our part of the bargain, our half of the partnership. So let’s keep up the dialog… let us know when we’re not clear, or when we can do better – because the better our regulations are understood by you, the more successful our critical enforcement efforts will be.

So please know that we appreciate our working relationship on the war on terror, and that we view you as a partner in other critical ways, as well.

You’re a partner in economic growth, as I mentioned before.

You are a vital part of two markets that are essential to our continuing economic growth: housing and small business.

As you know, the increase in homeownership and new home construction have been central components in our economic recovery.

And the American system of homeownership is a pillar of our economy, symbolic of our national identity and character, the envy of the world.

That’s why it’s so very important to have a solid regulatory structure and a credible regulator for the government sponsored entities: Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBs).

With their important role helping to fund our mortgage markets we need to be sure that they are operating safely, prudently, and efficiently.

That’s why I’ve proposed that that OFHEO (the Office of Federal Housing Enterprise Oversight) and the Federal Housing Finance Board, be replaced by a stronger regulator, better capable of supervising these two entities that have become so large relative to the housing finance market and to the whole financial system of the country.

GSEs are able to borrow at rates that are lower than their other financial competitors, other financial institutions, because they are perceived by many in the marketplace to have a relationship with the government, they are perceived to have a government guarantee.

Since Fannie and Freddie trade at very narrow spreads to the very best paper in the world, which is the U.S. Treasury, they have become enormous entities, and they are growing at a very, very rapid rate. The debt levels they are issuing are sizable relative to the economy of the United States.

To put it into perspective, the U.S. Government debt held by the public is about $3.6 trillion; the GSEs now totals about $2.4 trillion and when you are that big you have potential significant impacts on financial markets.

Our goal at the Treasury Department is to promote the health and strength of the housing finance markets together with the health and strength of the U.S. financial system. In the United States’ economy today, the two are closely related.

We also want to ensure that GSEs are living up to the highest standards of corporate responsibility.

We don't believe in a 'too big to fail' doctrine, but the reality is that the market treats the paper as if the government is backing it. We strongly resist that notion.

You know that there is that perception. And it’s not a healthy perception and we need to disabuse people of that perception. Investments in Fannie and Freddie are uninsured investments.

That is why clear receivership authority is necessary Because there is investment risk, full and flexible authority for the orderly wind down of affairs of a GSE that gets into serious financial trouble is vitally important for market stability.

Blind faith in non-existent guarantees cannot be an acceptable substitute.

Those of you here today know and understand all this… but I want to reassure you that our regulatory plan for these entities that impact your business so much are fair and make sense.

The basic point is this: The current regulatory structure is not equipped to deal effectively with the current size, complexity and importance of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. We need a strong, credible, and well-resourced regulator with a clear mandate and all the powers of other world class financial regulators. It should oversee all the housing GSEs: Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Although the regulator would have a large umbrella where a number of joint supervisory activities would be conducted, beneath that authority responsibility could be divided, as appropriate in keeping with the different nature of the institutions. . . regulatory scrutiny for each will be on par, fully comparable, but structurally separate.

The minimum requirements for a credible GSE regulator are:

• The full box of supervisory tools available to a world-class regulator, as I outlined before congress last fall, including general regulatory authority;
• The power to monitor the operations of each GSE, including the power to review new activities;
• The power to set both minimum and risk-based capital levels;
• The power to place a GSE into receivership, in order to ensure an orderly wind-down of a failed institution. However, only Congress would have the authority to revoke Fannie Mae or Freddie Mac’s charters.
• The regulator must be funded through assessments on the regulated entities, and outside of the appropriations process.

The President’s budget recommends that the new regulator be housed in the Treasury Department, where it should benefit from the policy knowledge and expertise of the Treasury. Therefore, Treasury should have ability to review rules and regulations, policy statements, and the regulator’s budget.

GSE reform is pending before the Congress right now… it’s a critical time, legislatively, for details. So it's important to note that anything less than what I've outlined here today as the essential elements of authority for the new supervisor would be inadequate, not credible reform.

I believe that a new regulatory structure will benefit community banks and your customers by ensuring stability in our housing finance market.

We won’t consider a situation where your hard work, and your incredible success, is at risk. Homeownership is too important to all of us to let that happen.

Thank you again for your partnership, for all you do to promote the greatest strengths of the American economy: homeownership and small business.

You are financial heroes, and I appreciate the opportunity to speak with you today.

Thank you – have a great meeting.

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