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U.S. Treasury Secretary Timothy Geithner has made it clear that he does not expect to continue in his post for much more than another year, but until his eventual departure he will shepherd a monumental effort to remake the regulatory framework on the U.S. financial system.
Among the efforts ongoing, Geithner said Thursday at a meeting of the Financial Stability Oversight Council (FSOC), are stricter limits on risk-taking by systemically-important banks, broader oversight of the derivatives markets, new safeguards for the “plumbing” of the financial markets including reducing the vulnerability of money-market funds to runs on the market, and stronger protection for consumers and investors.
Geithner also touted “a much stronger set of protections in place against the ‘too big to fail’ problem. Among those are new global regulations that will require the biggest banks, like Bank of America, Citigroup, JPMorgan Chase and Wells Fargo – the four U.S. banks with more than $1 trillion in assets – among others, to hold more capital than smaller institutions.
The key elements of that strategy:
· Capital and liquidity rules that impose much tougher limits on leverage by the largest firms to both reduce the probability of failure and strengthen their ability to withstand the pressures of other institutions’ failures;
· New protections for derivatives, funding markets, and for the market infrastructure that together will help limit contagion across the financial system;
· Tougher limits on size, which will prevent the largest banks from becoming too large relative to the size of the financial system.
· And a bankruptcy-type framework to manage the failure of large financial firms, which in the United States we call “resolution authority,” that prohibits bailouts for private investors, protects the taxpayer, and forces the financial system to bear the costs of future crisis.
via Remarks by Treasury Secretary Tim Geithner on the State of Financial Reform.
Another process the FSOC is undertaking is deciding what non-bank firms should also be subjected to stricter leverage limits because of their capacity to threaten the stability of the financial system. The 2008 crisis may have reached its peak in an investment bank, but it was the threat of insurer AIG collapsing that prompted a massive bailout a week after Lehman Brothers’ failure and helped push Congress toward passing a massive bailout package for the industry.
The 800-pound gorillas in the room are Fannie Mae and Freddie Mac, the mortgage finance giants that continue to rely on the government’s support for survival. Geithner said that 2012 is a key year for mortgage market reforms that will make progress toward winding down the government-backed firms, but the process of restoring private capital to a housing market just a few years removed from a massive bubble and still in the midst of a hellacious downturn, is an effort that will last longer than his remaining time at Treasury.
The full text of Geithner’s remarks is here.