As prepared for delivery
WASHINGTON – Chairman
Johnson, Ranking Member Shelby, and members of the Committee, thank you for the
opportunity to appear here today to discuss progress implementing the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
The Dodd-Frank Act represents the
most significant set of financial reforms since the Great Depression. Its
full implementation will help protect Americans from the excessive risk,
fragmented oversight, and poor consumer protections that played such leading
roles in bringing about the recent financial crisis.
That crisis, and the recession that
accompanied it, cost nearly 9 million jobs, erased a quarter of families’
household wealth, and brought GDP growth to a low of nearly negative 9
percent.
Today, our economy has improved
substantially, although more work remains ahead. More than 4.3 million
private sector jobs have been created over the past 27 months and, since
mid-2009, our economy has grown at an average annual rate of 2.4 percent.
As part of our broader efforts to
strengthen the economy, Treasury is focused on fulfilling its role in
implementing the Dodd-Frank Act to build a more efficient, transparent, and
stable financial system—one that contributes to our country’s economic strength,
instead of putting it at risk.
The Dodd-Frank Act’s reforms
address key failures in our financial system that precipitated and prolonged
the financial crisis. The Act’s core elements include:
Tougher
constraints on excessive risk-taking and leverage across the financial system.
To lower the risk of failure of large financial institutions and reduce damage
to the broader economy in the event a large financial institution does fail,
the Dodd-Frank Act provides authority for regulators to impose tougher
safeguards against risks that could threaten the stability of the financial
system and the broader economy.
The Federal Reserve
has proposed new standards to require banks to hold greater capital against
risk and fund themselves more conservatively. New rules restricting
proprietary trading under the Volcker Rule and limits to the size of financial
institutions relative to the total financial system have been proposed or will
be proposed in the coming months. Safeguards against excessive risk-taking
and leverage will not only apply to the biggest banks, but also designated
nonbank financial companies. Importantly, the bulk of these requirements
do not apply to small and community banks, and help level the playing field for
these smaller participants by helping eliminate distortions that previously
favored the biggest banks that held the most risk.
The Dodd-Frank Act
also established the Financial Stability Oversight Council (the Council) to
coordinate agencies’ efforts to monitor risks and emerging threats to U.S.
financial stability, and the Office of Financial Research (OFR) to collect and
standardize financial data, perform essential research, and develop new tools
for measuring and monitoring risk in the financial system.
Orderly
liquidation authority. The Dodd-Frank Act created a new orderly
liquidation authority to resolve a failed or failing financial firm if its
failure would have serious adverse effects on the financial stability of the
United States. The statute makes clear that taxpayers will not be put at
risk in the event a large financial firm fails. Investors and management,
not taxpayers, will be responsible for the cost of the failure.
The FDIC has
completed most of the rules necessary to implement the orderly liquidation authority,
and is engaging in planning exercises with Treasury and other regulators to
coordinate how it would work in practice. This summer, the largest bank
holding companies will submit the first set of “living wills” to regulators and
the Council. These documents will lay out plans for winding down a firm
if it faces failure.
Comprehensive
oversight of derivatives. The Dodd-Frank Act created a new
regulatory framework for over-the-counter derivatives markets to increase
oversight, transparency, and stability in this previously unregulated area of
the financial system.
Regulators have
proposed almost all the necessary rules to implement comprehensive oversight of
the derivatives markets, and we expect most to be finalized this year. We
are already seeing signs of standardized derivatives moving to central
clearing, and substantial work is being done to build out new financial
infrastructure to move trades into clearing and onto electronic trading
platforms.
Stronger
consumer financial protection. The Dodd-Frank Act created the
Consumer Financial Protection Bureau (CFPB) to consolidate consumer financial
protection responsibilities that had been fragmented across several federal
regulators into a single institution dedicated solely to that purpose.
The CFPB’s mission is to help ensure consumers have the information they need
to make financial decisions appropriate for them, enforce Federal consumer
financial laws, and restrict unfair, deceptive, or abusive acts and practices.
The CFPB is currently
working to improve clarity and choice in consumer financial products through
the Know Before You Owe project, which aims to simplify mortgage forms, credit
card disclosures, and student financial aid offers. The CFPB is also
focused on helping improve consumer financial protections for groups like
servicemembers and older Americans, as well as bringing previously unregulated
consumer financial institutions, like payday lenders, credit reporting bureaus,
and private mortgage originators, under federal supervision for the first
time. Earlier this year, the CFPB commenced its supervision of debt
collectors and credit reporting agencies.
Transparency
and market integrity. The Dodd-Frank Act included a number of
measures that increase disclosure and transparency of financial markets,
including new reporting rules for hedge funds, trade repositories to collect
information on derivatives markets, and improved disclosures on asset-backed
securities.
This summer, the
largest hedge funds and private equity funds will be required to report
important information about their investments and borrowing for the first time,
helping regulators understand exposures at these significant investment
vehicles. New swaps data repositories are being created that will provide
regulators and market participants with a stronger understanding of the scale
and nature of exposures within previously opaque derivatives markets.
Treasury’s core responsibilities in
implementing the Dodd-Frank Act include the Secretary’s role as Chairperson of
the Council, standing up the Office of Financial Research and Federal Insurance
Office, and coordinating the rulemaking processes for risk retention for
asset-backed securities and the Volcker Rule.
The Financial Stability
Oversight Council
The Dodd-Frank Act created the
Financial Stability Oversight Council to identify risks to the financial
stability of the United States, promote market discipline, and respond to
emerging threats to the stability of the U.S. financial system.
The Council is actively engaged in
these activities and has begun to institutionalize its role. To date, the
Council has held 17 principals meetings, four since I last testified in
December. In recent months, the Council’s principals have come together
to share information on a range of important financial developments as the
Council, its members, and staff have actively engaged in monitoring the
situation in Europe, in housing markets, the interaction of the economy and
energy markets, and the lessons to be drawn from recent errors in risk
management at several major financial institutions, including the failure of MF
Global and trading losses at JPMorgan Chase. In addition to regular
engagement at the principals level, the Council has active staff discussions
through twice monthly deputies level meetings and ongoing staff work on
individual committee and project workstreams.
The Council expects to release its
second annual report on financial market and regulatory developments and
potential emerging threats to our financial system in July. In addition
to providing new recommendations, the report will include an update on the
progress made on last year’s recommendations, which focused on enhancing the
integrity, efficiency, competitiveness, and stability of U.S. financial
markets, promoting market discipline, and maintaining investor confidence.
One of the duties of the Council is
to facilitate information-sharing and coordination among its members regarding
rulemaking, examinations, reporting requirements, and enforcement
actions. Through meetings among principals, deputies, and staff, the
Council has served as an important forum for increasing coordination among the
member agencies. Some argue that the Council should be able to ensure
particular outcomes in independent agencies’ rules, or perfect harmony between
rules with disparate statutory bases. While the Council serves a very
important role in bringing regulators together, the Dodd-Frank Act did not
eliminate the independence of regulators to write rules within their statutory
mandates.
Nonetheless, the Dodd-Frank Act
implementation process has brought about unprecedented cooperation among
agencies in writing new rules for our financial system. As Chair of the
Council, Treasury continues to make it a top priority that the work of the
regulators is well-coordinated.
The Treasury Secretary, as
Chairperson of the Council, is coordinating the rulemaking required for the
Dodd-Frank Act’s risk retention requirements, which are designed to improve the
alignment of interests between originators of risk and securitizers of, and
investors in, asset-backed securities. After the proposed rule was
released, the rule-writers received over 13,000 comment letters, and they are
continuing to review feedback as they work towards a final rule.
The Council has also made progress
on two of its direct responsibilities under the Dodd-Frank
Act: designating financial market
utilities (FMUs) and nonbank financial companies for enhanced prudential
standards and supervision.
In July 2011, the Council finalized a rule setting the process and criteria
for designating FMUs and, in August, began working to identify FMUs for
consideration in accordance with the statue and the rule. In January
2012, an initial set of FMUs were notified that they would be under
consideration for designation. In May, the Council unanimously voted to
propose the designation of an initial set of FMUs as systemically
important. This vote is not a final determination, and FMUs may request a
hearing before the Council to contest a proposed designation. The Council
expects to make final determinations on an initial set of FMU designations as
early as this summer.
In April 2012, the Council issued a
final rule and interpretive guidance establishing quantitative and qualitative
criteria and procedures for designations of nonbank financial companies.
The Council has begun work to apply the process described in the
guidance. The Council recognizes that the designation of nonbank financial
companies is an important part of the Dodd-Frank Act’s implementation and
intends to proceed with due care as expeditiously as possible.
The Dodd-Frank Act also provides
for limits on the growth and concentration of our largest financial
institutions. The Council has released a study and recommendations on the
effective implementation of these limitations, and the Federal Reserve is
expected to propose a rule to implement concentration limits later this year.
The Office of Financial
Research
The Dodd-Frank Act established the
Office of Financial Research to collect and standardize financial data, perform
essential research, and develop new tools for measuring and monitoring risk in
the financial system.
In December 2011, President Obama
nominated Richard Berner to be the OFR’s first Director. I appreciate
this committee’s support of Mr. Berner’s nomination. Confirmation by the
full Senate is important to ensure the OFR can fulfill its critical role.
A key component of the OFR’s
mission is supporting the Council and its member agencies by analyzing
financial data to monitor risk within the financial system. Currently,
the OFR is working on a number of projects with the Council, including
providing analysis related to the Council’s evaluation of nonbank financial
companies for potential designation for Federal Reserve supervision and
enhanced prudential standards; providing data and analysis in support of the
Council’s second annual report on financial market and regulatory developments
and potential emerging threats to our financial system; and, in collaboration
with Council member agencies, developing metrics and indicators related to
financial stability.
To avoid duplicating existing
government collection efforts or imposing unnecessary burdens on financial
institutions, the OFR is focused on ensuring it relies on data already
collected by regulatory agencies whenever possible. The OFR is working
with regulators to catalogue the data they already collect, along with
exploring ways it could promote stronger data sharing for the regulatory
community to generate efficiencies and improved interagency
cooperation.
As part of its mission, the OFR is
also promoting standards to improve the quality and scope of financial data,
which in turn should help regulators and market participants mitigate risks to
the financial system and provide firms with important efficiencies and
cost-savings. One ongoing priority is establishing a Legal Entity
Identifier (LEI), or unique, global standard for identifying parties to
financial transactions, to improve data quality and consistency. The OFR
is playing a lead role in the international process coordinated by the
Financial Stability Board (FSB) to develop an LEI. Just last week, the
FSB endorsed recommendations the OFR developed in conjunction with its
international counterparts to establish a global LEI system. This
recognition allows market participants to begin preparing for the
implementation of the global LEI next year.
A more comprehensive understanding
of the largest and most complex financial firms’ exposures is critical to
identifying risks to the financial system and mitigating future crises.
However, some have expressed concerns about the OFR—involving its
accountability, access to personal financial information, and ability to secure
sensitive data—that are unfounded.
First, Congress has oversight
authority over the OFR, and the statute requires the Director to testify
regularly before Congress. Consistent with requirements under the Dodd-Frank
Act, the OFR will provide the Congress with its first Annual Report on its
activities this summer and a second report, on the Office’s human resources
practices, later this year. In addition, the Dodd-Frank Act provides
authority for Treasury’s Inspector General, the Government Accountability
Office, and the Council of Inspectors General on Financial Oversight to oversee
the activities of the OFR.
Second, regarding data collection,
the Dodd-Frank Act does not contemplate and the OFR will not collect personal
financial information from consumers. The OFR, like other banking
regulators, only has the authority to collect information from financial
institutions, not individual citizens. The OFR will only utilize data
required to fulfill its mission—assessing threats to stability across the
financial system.
Lastly, data security is the
highest priority for the OFR. As an office of the Department of the
Treasury, the OFR utilizes Treasury’s sophisticated security systems to protect
sensitive data. The OFR is also implementing additional controls for
OFR-specific systems, including a secure data enclave within Treasury’s IT
infrastructure. Access to confidential information will only be granted
to personnel that require it to perform specific functions, and the OFR will
regularly monitor and verify its use to protect against unauthorized
access. In addition, the OFR is working in collaboration with other
Council members to develop a mapping among data classification structures and
tools to support secure collaboration and data sharing. Such tools include a
data transmission protocol currently used by other Council members that will
enable interagency data exchange and a secure collaboration tool for sharing
documents.
The Federal Insurance Office
The Dodd-Frank Act created the
Federal Insurance Office to monitor all aspects of the insurance industry,
identify issues or gaps in regulation that could contribute to a systemic
crisis in the insurance industry or financial system, monitor the accessibility
and affordability of non-health insurance products to traditionally underserved
communities, coordinate and develop federal policy on prudential aspects of
international insurance matters, and contribute expertise to the Council.
As a member of the Council, FIO, in
addition to two additional Council members that focus on insurance, has been
actively involved in the rulemaking establishing the process for the
designation of nonbank financial companies. FIO will be engaged in the
review of nonbank financial companies as this process moves forward.
Until the establishment of FIO, the
United States was not represented by a single, unified federal voice in the
development of international insurance supervisory standards. FIO is
providing important leadership in developing international insurance
policy. Recently, FIO assumed a seat on the executive committee of the
International Association of Insurance Supervisors (IAIS). The IAIS, in
cooperation with the Financial Stability Board (FSB), is developing the
methodology and indicators to identify global systemically important insurers,
and FIO is actively engaged in that process. Additionally, FIO
established and has provided necessary leadership in the EU-U.S. insurance
dialogue regarding such matters as group supervision, capital requirements,
reinsurance, and financial reporting. FIO also participated in the recent
U.S.-China Strategic and Economic Dialogue in Beijing. Importantly, FIO
has and will continue to work closely and consult with state insurance
regulators and other federal agencies in its work.
Priorities Ahead
Under the Dodd-Frank Act, Treasury
is charged with coordinating the implementation of the Volcker Rule. Treasury
is actively engaged with the independent regulatory agencies in their work to
finalize the Volcker Rule and make sure it is implemented effectively to
prohibit proprietary trading activities and limit investments in and
sponsorship of hedge funds and private equity funds.
The five Volcker Rule rulemaking
agencies released substantially identical proposed rules, which reflect the
commitment of Treasury and the regulators to a coordinated approach. The
comment periods for all five rulemaking agencies are now complete, and we are
reviewing and analyzing over 18,000 public comment letters. Treasury is
hosting and actively participates in weekly interagency meetings to review
those comments, and remains committed to fulfilling our coordination role and
working with the rulemaking agencies to achieve a strong and consistent final
rule.
Regulators are still in the process
of conducting their evaluation of what happened with respect to recent losses
at JPMorgan Chase, and why. The lessons learned from the recent failures
in risk management at JPMorgan are an important input into the ongoing efforts
to design strong safeguards and reforms, including, of course, those in the
Volcker Rule.
The Volcker Rule, as reflected in
the statutory language enacted as part of the Dodd-Frank Act and in the
proposed rule, explicitly exempts from the prohibition on proprietary trading
the ability of firms to engage in “risk-mitigating hedging activities in
connection with and related to individual or aggregated positions…designed to
reduce the specific risks to the banking entity.” To that end, the final
rule should clearly prohibit activity that, even if described as hedging, does
not reduce the risks related to specific individual or aggregate positions held
by a firm.
The exposures accumulated by
JPMorgan, in the words of its executives, resulted in potential losses that
exceeded its internal limits and those estimated by its internal risk
management systems. This raises concerns that go well beyond the scope of
the Volcker Rule. Among other things, regulators should require that
banks’ senior management and directors put in place effective models to
evaluate risk, strengthen reporting structures to ensure risks are assessed
independently and at appropriately senior levels, and establish clear
accountability for failures in risk management. Regulators should make
sure that they have a clear understanding of exposures and that banks and their
senior management are held accountable for the thoroughness and reliability of
their risk management systems. To further accountability, there should
also be appropriate public transparency of risk management systems and internal
limits.
Ultimately, the true test of reform
is not whether it prevents firms from taking risk or from making mistakes, but
whether our financial regulatory system is tough enough and designed well
enough to prevent those mistakes from hurting the broader economy or costing
taxpayers money. We all have an interest in achieving this outcome.
I emphasize the broader framework
of reforms because our ability to protect the economy from financial mistakes
in banks depends on the authority and resources we have to enforce tougher
capital, leverage, and liquidity requirements on banks and the largest, most
complex nonbank financial companies.
It depends on our ability to put in
place the full framework of protections in the Dodd-Frank Act on derivatives,
from margin requirements and central clearing of standardized derivatives to
greater transparency into risks and exposures.
It depends on the resources
available to the SEC, the CFTC, the CFPB and the other enforcement
authorities to police and deter manipulation, fraud, and abuse.
It depends on our ability to
protect taxpayers from future financial failures, in particular our ability to
safely unwind a large firm without the broad collateral damage and risk to the
taxpayer that we experienced in 2008.
And it depends on making sure that
no exception built into the law is allowed to swallow the rule, frustrate the
core purpose of the legislation, or otherwise undermine the impact of the tough
safeguards we need.
The challenges our economy
continues to experience since the financial crisis in 2008 only increase our
commitment to make sure we meet our responsibility to the American public to
implement lasting financial reform.
Recent events provide an additional
reminder that comprehensive reform must continue to move forward. The
Administration will continue to resist all efforts to roll back reforms already
in place or block progress for those that remain to be implemented. The
lessons of the financial crisis should not be left unlearned or forgotten, nor
should American workers—or American taxpayers—be left unprotected from the
consequences of future financial instability.
I appreciate the opportunity to
discuss the priorities and progress associated with our work implementing the
Dodd-Frank Act, and the leadership and support of this committee in those
efforts.
Thank you.
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