Video: Geithner calls for single agency to oversee systemic risks
Treasury Secretary Timothy Geithner called for “new rules of the game” on Thursday, including a systemic-risk regulator, stronger capital cushions for banks, and more disclosure from hedge funds.
The broad-brush vision also would have derivatives such as credit default swaps trade via a central clearinghouse. Higher standards for money-market mutual funds — a weakness exposed after Lehman Bros.’ collapse — also are a top priority.
“This crisis has made clear that certain large, interconnected firms and markets need to be under a more consistent, and more conservative regulatory regime,” Geithner told the House Financial Services Committee. “These standards cannot simply address the soundness of individual institutions, but must also ensure the stability of the system itself.”
Another key part of his reform plan unveiled earlier in the week would give authorities power to prevent the disorderly liquidation of all systemically important non-bank financial firms. That would include insurers such as AIG (AIG) as well as bank holding companies.
Act Locally, Think Globally
Geithner noted the need for global cooperation in addressing systemic risk, which will top the agenda at next week’s G-20 summit in London.
“We need to prevent national competition to reduce standards and encourage a race to higher standards,” he said.
Further Obama administration proposals will fill in gaps to regulation and consumer protections.
The regulatory framework is unfinished. That was clear when Rep. Don Manzullo, R-Ill., asked Geithner to give guidance as to whether tens or thousands of firms would be deemed systemically important.
Geithner said he couldn’t answer without Congress’ input. He also chose not to delve into “complex and sensitive questions of (which regulator) should be responsible for what.”
A systemically important designation would have major ramifications. Treasury wants the systemic-risk regulator to oversee all such firms. They also would face higher capital requirements and more stringent rules regarding liquidity and credit risk management.
“Capital requirements for these firms must be . . . sufficiently robust to be effective in a wider range of deeply adverse economic scenarios than is typically required,” Geithner said.
He said stronger standards on bank leverage are needed “to protect against the moral hazards presented by (deposit) insurance.”
But big firms might enjoy lower borrowing costs from the implicit government backing.
Some in and out of Congress wondered if a systemically important label could create an unfair playing field for smaller rivals. But academics and business groups generally welcomed Geithner’s ideas.
San Diego State University finance professor Dan Seiver said that “lax oversight and insufficient regulation” were certainly among the culprits of the financial crisis.
He praised the idea of getting rid of counterparty risk in credit default swaps by moving trading to a clearinghouse, as well as more conservative capital rules.
“If you’ve got 30-to-1 leverage, you’ve got no protection at all,” Seiver said.
Michael Pease of the Securities Industry and Financial Markets Association said his group “has been advocating for many of the same reforms” that Geithner outlined.
In recent years, hedge fund registration has been controversial. Treasury wants hedge funds, as well as private equity and venture capital funds above a certain size to report the information needed “to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability.”
The Securities and Exchange Commission would share these confidential reports with the systemic-risk regulator.
Geithner also said financial regulators must issue standards to reward “long-term performance . . . rather than short-term profits.”