FROM THE OFFICE OF PUBLIC AFFAIRS

Critical Infrastructure Protection – preventive care

While we have experienced great success and progress in the fight against terrorism, we are still exposed to significant risks of economic disruption from terrorist attacks. The President has named Treasury as the lead agency to enhance the resiliency of the critical financial infrastructure. The U.S. financial system has proven to be extremely resilient in the face of this threat. Events such as 9/11 and the more recent electrical power outage of last August that affected cities from Cleveland to New York found the financial system adapting and performing extraordinarily well.

Our challenge is to continue to work, in cooperation, with other federal and regulatory agencies, state governments and the private sector to develop and promote policies that further enhance the resiliency of the economy. We must develop and support policies that minimize the economic damage and speed economic recovery from a terrorist attack as well as an infrastructure support failure, cyber attack or a natural disaster. Treasury works closely with the private sector — through organizations such as the Financial Services Sector Coordinating Council (FSSCC) — as well as other federal and state financial regulators — as chair of the Financial and Banking Information Infrastructure Protection Committee (FBIIC) — to protect the critical infrastructure of the financial services sector. Treasury’s Office of Critical Infrastructure Protection is conducting outreach meetings throughout the U.S. The meetings are aimed at working at the local level to alert financial services institutions of physical and cyber threats, as well as discussing and implementing preventive measures.

Another initiative in this area is the “Protective Response Planning Program”. This program brings together federal and local government officials, members of law enforcement and individuals from important financial institutions to develop and coordinate emergency responses to major disruptions at these specific institutions.

Treasury has invested $2 million to create the Next Generation Financial Services Information Sharing and Analysis Center (FS-ISAC). Information Sharing and Analysis Centers are the cornerstone of the President’s strategy to disseminate information to protect our critical infrastructures. The next generation FS-ISAC will provide timely physical and cyber risk information and has the capability to reach nearly all institutions in the sector.

Another important program in this area is the Government Emergency Telecommunications Service (GETS) program. This program, which is run by the National Communications Service, provides critical members of the private sector priority access to the telecommunication system. In times of emergency when the telephone system experiences heavy traffic, GETS users can complete their calls faster so that they may discuss and coordinate emergency decisions.

Our objective is to further insure that Americans and the world can feel confident when they place their investments in an U.S. financial institution. We want investors to know that cooperative efforts are ongoing between the private and government sectors to protect our financial institutions and systems. This resilience mitigates the economic risks of terrorist attacks and other types of disruptions, both to the financial system itself and to the American economy as a whole.

GSE regulatory reform – preventive care

My 20-year career in financial markets has taken me back and forth between the public and private sectors – experience as both “game warden” and “poacher”. And from that experience it is has always been clear to me that financial innovation outpaces a regulator’s capacity. Since 1996, the debt issued by the GSEs has more than tripled, reaching $2.6 trillion. The privately-held debt of the Federal government is $3.6 trillion to give you some perspective. It’s important to address any changes in “risk” before there is a problem. So periodically, it makes sense to pause, re-evaluate, re-tool and allow the regulator to “catch up”. This is especially critical now as we discuss GSE regulatory reform, given the GSE’s importance in assuring financing for home ownership.

Our initiative is simple - establish a regulatory regime comparable to the stature, powers, and resources of other world class financial regulators. The Administration’s reform package builds upon the “three pillars” of financial services regulation: market discipline, supervision and examination, and capital requirements. And their special housing mission should be strengthened to assure that they serve the public interest.

The housing mission is a high priority of this Administration. The President has set a goal to increase the number of minority homeowners by at least 5.5 million families by end of decade. The Administration strongly supports GSE reform and will continue to work closely with House and Senate leadership on this issue.

RSAs/LSAs – proper nutrition

The Administration has put forth an initiative to simplify and increase savings by Americans. Greater savings mean more investment; greater capital accumulation, higher living standards, and a more secure future for individuals of all income levels. Confusion and frustration are far too common among individuals trying to save because current savings initiatives are too complex and burdensome for many. In 1982, the IRS publication explaining individual retirement accounts was 12 pages long. Now it is over 100 pages long. People should not have to worry about the confusing maze of different savings accounts and their confusing rules.

This Administration is committed to simplifying savings proposals in order to provide Americans of all income levels the opportunity and flexibility that they need to save for their futures. The President’s 2005 budget includes a proposal that would create two simplified, tax-free savings accounts: Retirement Savings Accounts (RSAs)- can be used for retirement - and Lifetime Savings Accounts (LSAs) - can be used for, education, a new home, healthcare needs, or to start a business. The combination of universal eligibility and unrestricted tax-free withdrawals greatly simplifies the whole process, making it more likely that average taxpayers will participate. These savings accounts, with uniform, simple rules will remove many of the barriers to access imposed by existing accounts, and make it easier for financial services firms to offer and promote tax preferred savings accounts.

The new accounts will give more hardworking Americans the chance to save so they can enrich their lives and strengthen their retirement security. They make saving simple for everyone and for every purpose. No longer will individuals have to worry about the confusion of different savings accounts. No longer will people have to worry about the endless maze of confusing rules. The two simple accounts will have one powerful goal…making savings for everyday life and retirement security easier and more attractive.

Other – monitoring or check-ups

There are other issues that, while not initiatives of the Administration, nor issues in which we’ve yet taken a particular position, we are closely following because of their potential impact on the financial services industry.

One is the new Basel Accord. The Basel Committee is currently working to issue the revised Accord by mid-year 2004. A number of important technical issues are being addressed including unexpected versus expected losses, capital requirements for retail exposures (e.g., unused credit card lines), and treatment of asset securitizations. As part of the regulatory process, U.S. bank and thrift regulators have been reviewing comments received from the industry.

Treasury recognizes the problems associated with Basel I, and that a replacement is needed. To date, Treasury has not taken a direct role in the revisions to the Basel Accord, instead leaving that to the U.S. banking regulators. Our role has been that of an interested observer, as we continue to carefully monitor and analyze developments in the revision process. We have meant with industry and regulatory representatives and are aware of the concerns of possible “unintended consequences” arising from the Accord. We will continue to monitor issues regarding the Accord.

European Union Financial Conglomerate Directive

We are also paying close attention to the issue of the European Union Financial Conglomerate Directive (FCD). The directive would require that if a financial conglomerate does not have an “umbrella” supervisor in their parent country that provides “equivalent” supervision, then it is subject to oversight by an EU supervisor. It is unclear what criteria will be used to verify equivalence. Treasury has indicated that an “equivalency” determination is very important for the U.S. and that we are following this process very closely. Decisions regarding whether U.S. agencies (Federal Reserve, OTS, SEC, and NAIC) meet the equivalent supervision threshold are due to be made this spring.

Conclusion

The protection, maintenance, and growth of the financial services industry are critical to the health of the U.S. economy. Recent economic indicators are strong; factory orders are up, retail sales are up, the housing market is booming, productivity over the past 3-years has been increasing at a 4.1 percent annual rate, the unemployment rate is moving down. The US economy grew at over 8% and 4% for the 3rd and 4th quarters of ’03 respectively and is projected to grow over 4% this year – the third consecutive year the U.S. economy will grow faster than most other industrialized economies. Still, more needs to be done. Completing our initiatives on critical infrastructure protection, GSE reform and increasing the savings opportunity for all Americans is part of our plan for sustained prosperity. We look forward to continuing our work with the Congress and the financial services industry on these and other pertinent issues.

Thank you