DATE: MARCH 27, 2009
TO: NCOIL LEGISLATORS
FROM: SUSAN NOLAN, NCOIL
RE: GEITHNER INTRODUCES REGULATORY REFORM PLAN
Linked below is the following information:
Geithner Calls for Tighter Oversight of Financial Industry(3/26 Congressional Quarterly)
Geithner Proposes Vast Expansion of U.S. Oversight of Financial System(3/26 Washington Post)
Treasury Outlines Framework for Regulatory Reform(3/26 U.S. Treasury Department)
Hearing testimony and video may be found at:http://www.house.gov/apps/list/hearing/financialsvcs_dem/press031309.shtml
U.S. Treasury Secretary Tim Geithner announced the Administration’s regulatory reform plan during a U.S. House Committee on Financial Services hearing yesterday. The Secretary described the first area of a four-point comprehensive reform framework—addressing systemic risk in our financial system.
COMPREHENSIVE FRAMEWORK
The Administration’s regulatory reform plan will cover four broad areas: systemic risk, consumer and investor protection, eliminating gaps in our regulatory structure, and international coordination.Secretary Geithner said that he would provide detailed frameworks for each of the four areas in the coming weeks.
Geithner said that he would focus on systemic risk first, “not just because of its obvious importance to our future economic performance, but also because these issues require more cooperation globally, and they will be at the center of the agenda at the upcoming Leaders’ Summit of the G-20 in London on April 2.”
SYSTEMIC RISK
In his oral and written testimony, and also in an outline provided by the Treasury Department, Secretary Geithner outlined six key elements of the Administration’s plan to address systemic risk. The elements are indicated below.
A single independent regulator with responsibility over systemically important firms and critical payment and settlement systems
Sec. Geithner said that characteristics that determine “systemically important” firms could include an institution’s interdependence with the financial system, size, and leverage, among other things. He explained that the term should focus on what companies do, not the form that they take.
Higher standards for capital and risk management for systemically important firms
Sec. Geithner said that systemically important firms should be subject to more conservative capital standards as well as more stringent liquidity, counterparty, and credit risk requirements.
Registration of all hedge fund advisers managing assets above a moderate threshold
The plan calls for hedge fund advisers whose assets meet a certain threshold to register with the SEC and be subject to disclosure and regulatory reporting requirements.
A comprehensive framework of oversight, protections and disclosure for the OTC (over-the-counter) derivatives market
The plan calls for regulating credit default swaps (CDS) and OTC derivatives for the first time by requiring clearing through central counterparties, and developing new “robust” regulatory standards.
New requirements for money market funds to reduce the risk of rapid withdrawals
The plan recommends that the SEC strengthen the regulatory framework for money market funds.
A stronger resolution mechanism that gives the government tools to protect the financial system and the broader economy from the potential failure of large complex financial institutions
Sec. Geithner presented the Committee with draft legislation to provide the federal government with authority to seize and liquidate failing companies to “avoid the disorderly liquidation of any nonbank financial firm whose disorderly liquidation would have serious adverse effects on the financial system.” The plan would cover institutions that have the potential to pose systemic risks—including insurance companies—and would be modeled after the resolution authority currently granted to the FDIC for banks.
QUESTION & ANSWER
Noteworthy questions, comments, and exchanges include:
Secretary Geithner said the systemic regulator should not be housed in the Treasury Department. He said that it should be an independent agency and that it could build on the current regulatory regime for holding companies.
Secretary Geithner said that a good case could be made for introducing an OFC for insurance. Responding to a follow-up question from Congressman Paul Kanjorski (D-PA), the Secretary supported Congress acting quickly to establish an Office of Insurance Information (OII) at Treasury.
Secretary Geithner, responding to a question from Congressman David Scott (D-GA) regarding why the program would pull in insurance which had operated well during the crisis, said that we need better, smarter, tougher regulation but that does not mean that existing authority should be taken away from insurance and banking regulators. He added that the program would be “fully compatible” with maintaining insurance commissioners’ role in supervising insurance companies.
Secretary Geithner, responding to a question from Congressman Scott regarding where in the federal government the power to seize nonbank companies should lie, said that resolution authority would be based on the FDIC model that includes checks-and-balances to limit discretionary authority and reduce any moral hazard potential. He said that the FDIC mechanism has this “great virtue”—that any action requires support from a majority of the Board of the FDIC, a majority of the Board of Governors, and a judgment by the Treasury Secretary, on behalf of the U.S. President.
Chairman Barney Frank (D-MA) said that—as long as he is Chairman—the Committee will not consider legislation to determine insurance rates. He asked the Secretary to address in writing whether the property-casualty and life insurance industries should be regulated differently.
Ranking Member Spencer Bachus (R-AL) expressed support for resolution authority but argued that the new regime should not rely on taxpayer funding and cautioned that, as proposed, federal regulators would be empowered with “incredible discretion.”
Secretary Geithner, responding the CDS questions from various Members, said that: banning “naked” swaps is not necessary; distinguishing naked and covered swaps can be difficult; CDS should be brought into the regulatory system with the use of exchanges and disclosures, among other things.
Secretary Geithner,in response to a question from Congressman Joe Donnelly (D-IN), said that mutual funds as well as hedge funds should be in the program.
Feel free to contact me by reply e-mail or at 518-687-0178 or to contact Mike Humphreys at or at 202-220-3014.