I am glad to be at this year's Delivering Alpha and to be here in New York, not far from Wall Street, the engine of America's financial system.
Next week will mark the anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and I would like to spend a few moments this morning speaking about financial reform. What made it imperative. What we have accomplished. And what direction we are going in.
When President Obama took office a little more than four years ago, America was in the depths of the worst economic crisis in generations. We were losing an average of 750,000 jobs a month. Our economy was contracting at a rate of more than 5 percent. The pain was severe. You did not have to be harmed by the crisis directly to know how painful it was. There is a good chance that a family member, a neighbor, or someone you knew was affected by it. And the harm was not limited to the United States. It spread beyond our shores, damaging economies around the world and undermining our reputation as a leader among nations.
Now, there were a number of factors that led to this economic catastrophe. None more significant than the near collapse of our financial system. In the span of a few weeks, many of our nation's largest financial institutions failed or were forced to merge to avoid facing insolvency.
The panic that gripped the financial system reflected a buildup of risk that was mismanaged or misunderstood. Some found loopholes in an outdated regulatory system to take on more risk than they should have. Others created complex financial products that few understood. Borrowing standards loosened, allowing too many Americans to take on more debt than they could afford while leaving investors and institutions with risk they were unable to manage.
At the same time, government oversight failed to police or even detect the abuses that were occurring. Regulations on the books were old and worn out, leaving consumers, investors, and our financial system itself with inadequate protections. The regulators were operating under a structure that was largely designed in the aftermath of the Great Depression and was out of step with the far more complex, modern marketplace.
So the President faced an economy in freefall, and he moved quickly to break the back of the financial crisis, ease credit, and reignite growth. Because of his actions and those of the previous Administration, the Federal Reserve, and Congress our economy began to turn around, growing and creating jobs faster than many had anticipated.
But putting out the fires of the crisis was not enough. We had to reform our financial system. We had to strengthen the rules of the road, put powerful consumer protections in place, and modernize our regulatory framework. We also had to make sure taxpayers would never again be on the hook if a financial company failed.
So we took up the mantle of reform, and three years ago this month, the President signed Dodd-Frank into law. It created the strongest safeguards for consumers and investors since the Great Depression. And it did something few would have thought possible back in 2008. As a matter of law, Dodd-Frank ended the notion that any firm is "too big to fail." Banking will always involve some degree of risk-taking, and the goal is not to eliminate all risk in banking. But now, if a financial firm fails, taxpayers will not have to bear the cost of that failure.
Now despite what critics predicted, Dodd-Frank did not stifle economic growth. It did not halt lending activity. We are actually seeing just the opposite. Banks have more than doubled their capital on hand, while achieving nine straight quarters of loan growth. And with Dodd-Frank signed into law, forward economic momentum has continued.
We have experienced growth for 15 consecutive quarters. The private sector has created more than 7 million new jobs over the past 40 months. Taxpayer money that saved the financial system has been mostly repaid, with the bank investment programs under TARP earning a significant gain for taxpayers. The housing market is recovering, and home values are rebounding all across the country. Fannie Mae and Freddie Mac are turning profits again. And our deficits are falling even more rapidly than predicted.
Nevertheless, lingering scars from the crisis remain. We have more to do to create jobs, accelerate growth, and put our economy on a firmer foundation.
As we face the challenges ahead and rebuild even stronger for the future, let there be no doubt: finishing the job of financial reform is critically important to me and this Administration.
From my first hours as Treasury Secretary, I have been dedicated to stepping on the accelerator for the implementation of Dodd-Frank. In fact, I went right from my swearing-in ceremony in the oval office to chair my first meeting of the Financial Stability Oversight Council, and financial reform has been a central focus since. Going forward, we will measure our progress in weeks and months, not in years. And much of our remaining work will be completed in the next five months. Let me repeat: by the end of this year, the core elements of the Dodd-Frank Act will be substantially in place.
It is important to note that a lot has been done already. In the last 60 days alone, we have witnessed one of the most active periods of implementation. For instance, banking agencies have put in place higher capital standards and have proposed new leverage rules. The Commodity Futures Trading Commission has taken a major step forward on the international application of derivatives rules. The Securities and Exchange Commission is closer to creating new rules for money market mutual funds. And the Financial Stability Oversight Council designated two of the largest and most complex nonbank financial companies for consolidated supervision and enhanced prudential standards.
Our recent actions reflect a noticeable shift in the way many view financial reform. For a time, there were someâ"including some in this roomâ"who were determined to repeal or weaken the law and slow down implementation.
In those attempts to block implementation of Dodd Frank, you could hear echoes of Richard Whitney, the former President of the New York Stock Exchange, who in 1934 declared that the bill creating the SEC would "destroy our security markets." He added, "There is no important aspect of the economic life of this country whether it be agriculture, industry, banking or commerce which will not be adversely affected by this bill. The expansion of business under its provisions will be impossible."
Whitney, of course, was wrong then. And today, at least some of the alarmist thinking about Dodd-Frank has faded. There is now a consensus building that completing financial reform is necessary. There is an emerging recognition that a coherent framework of rules will provide needed certainty for borrowers, lenders, consumers, and financial institutions. There is an increasing acceptance that effective coordination among our regulators is necessary to eliminate gaps in oversight. And there is a growing understanding that once the rules are in place, there will be time to see what is working and what is not, and then we can make appropriate adjustments.
As we move ahead, here are important areas where we look forward to completing our work by the end of the year:
- Enhanced prudential standards for banks and designated nonbanks,
- Capital and margin rules for derivatives,
- New simplified mortgage disclosure, and
- The Volcker Rule.
I want to mention that the Volcker Rule is particularly important, and I will continue to push for swift completion of a rule that keeps faith with the intent of the statute and the President's vision.
Now, when we finish this work, our regulatory system will strike a balance between incentives for innovation and protections from excessive risk-taking. That balance has been the core strength of our financial system, and with that balance established once again, our markets will be in a better position to fuel economic growth without taking on excessive risk.
To be clear, this is not a test of how tough or how soft regulators can be. Critics from both sides will always be able to argue measures could be more or less stringent. This is about being effective so our financial system is competitive and efficient, while protecting our economy and taxpayers from excessive risk-taking.
Getting this done, however, will not be easy. And we will have to overcome challenges that continue to threaten our progress.
One challenge is to ensure other jurisdictions move forward swiftly with reforms as strong as our own. We will coordinate our efforts with our foreign partners who are pushing forward with similar reforms abroad. It is important to have clear and consistent rules both in the United States and beyond our borders. Our financial system is global in nature, and globally active firms face many rules and regulators.
But make no mistake: we will not let the pursuit of international consistency force us to lower our standards. The United States has demonstrated important global leadership in putting in place tough new reforms. And the clarity and reliability of our laws do not just provide a bulwark against danger, they serve as an impetus for a race to the top rather than a race to the bottom.
Another challenge is opposition coming from some corners of Congress. We are implementing reform with a solemn obligation to protect the American taxpayer. We never want to see failures on Wall Street inflict the kind of damage we saw five years ago. At the same time, we want to renew our financial system so that it can do what it does best channel the savings of Americans and investors to finance new innovation, new businesses, and new industries.
But we cannot meet this commitment unless Congress properly funds regulators to meet the significant new responsibilities with which we have charged them. The cost of a well-regulated financial system is tiny compared to the enormous cost of failure.
As part of Dodd Frank Act, we established the strongest set of federal consumer financial protection laws in our nation's history. For the first time, credit bureaus are supervised by a federal agency charged with consumer protection. And mortgage lenders, payday lenders, and credit card companies have been forced to stop misleading borrowers with unseen fees and unclear policy terms. American consumers finally have a watchdog in place that is looking out for them and putting an end to deceptive financial forms and practices. I am pleased the Senate confirmed Rich Cordray last night and that the distraction of delay will no longer impede progress. He has already demonstrated an ironclad commitment to making sure American consumers are protected and has won broad respect, in both parties and even in the industries he regulates.
Members of Congress who want to alter financial reform before it is fully in place should carefully consider implementation efforts that are approaching completion. Recent efforts to pass additional financial reform legislation both to curtail and expand protections fail to acknowledge the fact that major change is underway and will continue as the powerful tools created in Dodd Frank are implemented fully.
New rules will place higher costs and restrictions on the largest and most complex financial companies. This will constrain risk through substantially higher capital charges, and close gaps in regulation for activities like derivatives trading. The largest institutions will have to hold more and better-quality capital, making them less likely to fail and better able to withstand financial stress. U.S. Banking agencies have just proposed a leverage requirement of 5 to 6 percent for the largest banks, versus the minimum Basel standard of 3 percent. These rules will not treat large financial institutions and small institutions such as community banks the same. They will take into account that large financial companies pose significantly greater and distinct risks to the financial system.
As regulators work to implement reforms, Wall Street has already started to change. The largest financial institutions have significantly altered their business models. These institutions are better capitalized and are less leveraged. There has been movement away from risky proprietary trading and an increased focus on traditional banking. Over-the-counter derivatives are coming out of the shadows.
Even when implementation is complete, our work is not finished for all time. Dodd-Frank and new Basel standards also provide regulators with effective tools and authorities to address emerging risks. These powerful tools allow regulators to rein in excessive risk, to raise standards, to limit activities, and to take pre-emptive actions when compelled by threats to the financial system.
As it stands, regulators have already demonstrated their willingness to use the tools and authorities under Dodd-Frank. For example, Dodd-Frank requires stress tests to evaluate the adequacy of bank capital under scenarios of severe economic downturns. The Federal Reserve has forced firms that did not pass these tests to change their capital plans, and, in collaboration with the other banking regulators, is highly focused on the operational issues related to resolving complex bank failures. The regulators have also reviewed living wills from the country's largest banks and required the firms to revise their initial submissions to better address how they would wind themselves down when facing failure.
These examples demonstrate the kind of flexibility that will be required going forward to make sure that we effectively address new risks as they emerge. And it is important that regulators have room to be flexible to adjust to changing circumstances. We cannot limit ourselves to fighting the last war. Financial innovation has been and will remain at the core of our country's greatness but when it comes without regulation and oversight, this evolution can result in significant, and unacceptable risks. Keep in mind, cybersecurity was barely on the radar screen when the crisis unfolded. And we are more focused on operational risk today than ever before.
When we look back at the time of the Great Depression, we see a country that responded decisively to a financial crisis of epic proportions. We see the creation of the FDIC. We see the passage of laws like the Securities Exchange Act. We see reforms that fortified our financial system and led to the rise of the largest middle class the world has ever known.
But then the rules began to fall behind progress in the markets. Our financial system evolved beyond the protections that had been established. And we allowed our guard to come down. The result was a scale of damage to ordinary Americans, financial markets, and the broader economy that was measured in the millions of jobs, businesses, and homes lost, and trillions in wealth wiped out.
What we learned from this catastrophe is that we cannot let our vigilance wax and wane. We cannot afford to take 50 years off or even five. The financial system is dynamic. Firms are innovative. And sources of risk change. Regulation and oversight must keep pace.
Before I close, let me just point out that this discussion fits right in with the name of this conference "Delivering Alpha." This phrase means reaching a high level of performance, one that exceeds expectations. And I am here to say that we must always be striving for a higher level of performance when it comes to renewing our financial system.
That means we must stay on the job even after all the pieces of financial reform are in place. And we need to ask whether we have used all the tools of Dodd Frank as effectively as possible and whether other tools may be needed. In other words, after we finish implementing Dodd Frank, we must keep making sure that our markets are transparent, that our institutions remain safe and dependable, and that consumers and investors are protected.
The fact of the matter is, financial reform is not about writing a set of rules and then walking off the field. It is about an enduring commitment to making our financial system a model of stability and to keep it that way.