The statute requires insurance premiums to be largely based on total liabilities, which are a more accurate reflection of risk than deposits alone. As a result, the premium burden is tilted away from smaller banks to larger ones.
Second, Dodd-Frank provides that large financial institutions must hold more and higher-quality capital and maintain larger liquidity buffers. We want these firms to be less likely to fail and help them withstand financial stress. These higher standards will force large institutions to operate within a framework that reduces systemic risk and will result in an effective governor on size. Community banks, which do not pose the same type of risks to the system, will not be subject to the same obligations.
Third, Dodd-Frank levels the playing field between small banks and nonbank financial service providers, such as payday lenders and independent mortgage brokers. A major failure of our regulatory system prior to the crisis was that these institutions were allowed to compete against traditional banks for the same customers without playing by the same rules. To fix this imbalance, Dodd-Frank gives the Consumer Financial Protection Bureau the authority to regularly examine nonbank financial companies that provide certain consumer financial products and services.
Fourth, Dodd-Frank works to protect small banks from excessive supervisory burdens. The primary regulator responsible for monitoring the safety and soundness of community banks will also be responsible for enforcing rules promulgated by the new CFPB. This coordination will allow small banks to avoid multiple exams.
More broadly, the CFPB is required by law to consider the impact of proposed regulations on the smallest banks, and in certain cases, to establish panels to seek direct input from such institutions before proposing a regulation. On issues ranging from mortgage loans to money transfers, CFPB staff has been in regular contact with community banks to make sure their perspectives are well-represented.
Finally, the Dodd-Frank Act provides regulators the tools needed to wind down, break apart, and liquidate large financial companies. With these new tools, culpable management will be replaced, creditors will suffer losses, and shareholders will be wiped out. And large financial institutions – not smaller banks or taxpayers – will rightfully pay any costs associated with the wind down.
PRINCIPLES FOR THE PATH AHEAD
So, what is the path ahead? And what can you expect? The coming months will continue to be busy ones as we move into the homestretch of the rule-making process. We are moving quickly but carefully. And as we proceed, we plan to keep several core principles in mind.
First, we will not back away from our fundamental responsibility of making sure our financial system is safe. But we need smart regulation that can make future financial shocks less likely and less damaging – and without unnecessary compliance costs. We want to make sure the rules are calibrated so they allow investors to take appropriate risks and do not restrict businesses from obtaining the credit they need to hire, invest and grow.
That means we must continue to listen to a range of views—whether from regulatory agencies, financial institutions, investor advocacy groups, or other crucial stakeholders. We may not always agree, but the rules adopted so far have all benefitted from broad engagement. Collaboration is key to getting our policies right.
Second, we will aim to keep our rules as simple as possible, but recognize that simplicity is not always synonymous with smart. A recent paper delivered at the annual Federal Reserve conference held in Jackson Hole has attracted a great deal of attention on the subject of financial regulation. It is entitled “The Dog and the Frisbee” and was prepared by two officials at the Bank of England. If I can paraphrase their argument, it is that financial regulation is becoming too complex to be effective, and that we need clearer, more straightforward rules to manage complex firms.
Now, who can argue with that? Unfortunately, reality is more complicated.
Let me take the Volcker Rule as an example. Its intent is clear: prevent banks from making speculative bets that put customer deposits at risk and potentially expose taxpayers to losses. But then, five regulators proposed a joint rule and 18,000 comment letters arrived addressing all kinds of issues and concerns. As it turns out, the devil is in the details…
It is hard to write a very detailed rule that would address every concern that we hear. But it is even harder to write a simple rule that is conceptually clear to handle the nuances of a complex financial system.
So, we will strive for simplicity with Volcker and the other reforms we are implementing. We understand its value. At the same time, we are mindful of the need to have smart rules that are responsive to the unique needs of our financial system and promote economic growth.
Last, I want to emphasize that while we are working hard to implement reform, we are also humble about the task at hand. I often say financial crises never follow the same script. Problems can surface in unexpected ways that will challenge even the smartest regulations.
It’s not just the rules that matter. It’s the vigilance of public servants, private sector managers, and investors alike. Our regulators must be appropriately funded so they have the resources they need to watch over the markets. Financial firms and market participants must put in place appropriate measures to manage risk. And none of us can afford to be complacent when we spot trouble in our financial system.
Here, I’m reminded of another essay involving a dog -- the famous Sherlock Holmes mystery, “Silver Blaze.” In that story, the great detective notices “the curious incident” of a dog who didn’t bark. Holmes concluded that the intruder must have been someone the dog knew very well.
This seems to be the same situation we faced four years ago, in September 2008. Our regulatory system, our rating agencies, our investors and financial analysts let us down because they didn’t bark, or didn’t bark loud enough. Everyone thought that they understood what was going on inside large financial institutions and just how complex securities would perform. But to a significant extent they did not.
I know, and you know, that we don’t ever want to weather another financial storm like that again. That is why we need to get reform right. That is why we must develop rules that are not just simple but sophisticated. And that is why we must all be alert to the risks as they arise.
We must ensure that America’s markets and financial institutions maintain their rightful place as the safest and soundest in the world. We can only achieve this by working together.
I look forward to working with you and I would be happy to take a few questions.