Superintendent of Banks, Richard H. Neiman Addresses The Institute of International Bankers
March 2, 2009
Good afternoon. Thank you, Larry, for that warm welcome. And thank you for the important contributions that you and the IIB membership are making in this time of transition for the financial services industry world-wide. We can always rely on the IIB to pinpoint the key issues and to offer a fresh perspective. Your annual conference is an important venue for continuing the public-private dialogue that is needed to effectively restore financial stability.
I always appreciate the opportunity to join in your dialogue and to share my vision for banking regulation and international cooperation in an evolving global marketplace. The world has certainly changed since I spoke at the IIB conference last July on “US Regulatory and Compliance Requirements.” The industry best practices and risk management models that we discussed then are still critical, and yet the summer already seems so long ago.
The financial crisis went into high gear in September, with shocking headlines such as the GSEs entering into conservatorship and the failure of Lehman Bros. Now we have the TARP and the Financial Stability Plan, and Wall Street itself is being reinvented ahead of any structural changes by policymakers. These events have led to changes in the Department’s role as well.
Today I will briefly update you on-
- The latest priorities for the Department, including my role on the Congressional Oversight Panel; and,
- Restructuring of the US financial regulatory system.
What we are doing in New York is working to help restore market confidence.
Part I: Priorities for the Department
The primary mission for the Department remains the safety and soundness of the institutions we supervise. We have responsibility for a wide range of diverse and complex institutions, and the Department is the primary regulator for most of the foreign banking organizations doing business in the US. And our role in relation to foreign banks and the scope of our oversight of the capital markets are expanding.
- Chinese banks. In a little more than half a year, we have licensed branches for three banks from mainland China, the first to open in seventeen years since the adoption of the Foreign Bank Supervision Enhancement Act of 1991. I see this new trend as more than an example of the growing importance of trade between the two countries. This is historic because it demonstrates the globalization of Chinese banks, reflects confidence in the New York charter, and confirms New York as the global financial center. International banks have options with respect to charter choice, and these new branches show that state banking and New York as a business location remain competitive on the world stage.
- Goldman Sachs. Wall Street is in a period of transition, with the loss of the five main investment banks to merger, bankruptcy, or conversion to bank holding company status. But these changes can also be seen as market-based reforms and necessary retrenching that will ultimately lead to greater stability. With conversion to bank holding companies, institutions are seeking structures to provide higher levels of market confidence. Conversion offers access to more stable funding from deposits and a regulatory regime with higher capital requirements, lower leverage, and continual on-site supervision. This has major implications for us at the state level, as Goldman Sachs has become a state-chartered bank supervised by the Department and the Federal Reserve Bank of New York. I believe the combination of the Banking Department and Federal Reserve is a viable model to be considered by a range of financial institutions, both wholesale and retail.
- ICE. For example, the Department has recently approved the charter for another large, complex institution that will have a role to play in restoring market order. Intercontinental Exchange, Inc. is creating a New York-chartered trust company, ICE US Trust, LLC to serve as a central clearing facility for credit default swaps. The existence of central counterparties for CDSs will go a long way in covering gaps for this crucial sector of the market. New York’s role in chartering and supervising ICE will be a critical element of this new regulatory regime.
These examples all reflect confidence in New York as a center for business and demonstrate that state banking regulators deserve a prominent place in a renewed twenty-first century regulatory framework.
Part II: Regulatory Reform
But there is only so much any one state can do to promote market stability, even a progressive state like New York that is positioned at the crossroads of global finance. Restoring financial and economic stability is a national effort. So when the Emergency Economic Stabilization Act was adopted last November, Governor Paterson urged Congress to include a representative from New York on the Congressional Oversight Panel that is evaluating the Treasury Department’s implementation of the Troubled Asset Relief Program (TARP).
Overview of the Congressional Oversight Panel
Based on New York’s role as financial center, longstanding leadership in consumer protection and strength of the Banking Department, I am privileged to have been appointed as a Panel member by Speaker Pelosi. There are two other Democratic-appointed members- Elizabeth Warren, a law professor from Harvard with a specialty in bankruptcy law serves as the Chair, and Damon Silvers, the Associate Counsel of the AFL-CIO. The Republican-appointed members are Congressman Jeb Hensarling from Texas and former Senator John Sununu from New Hampshire. The Panel members have diverse and extensive experience with a range of ideological viewpoints, which I see as an advantage in our work.
The Panel’s tasks include both regular monthly reports as well as a special report on regulatory reform. You can read these reports on the Panel’s website at www.cop.senate.gov. The first regular report was issued in December, and laid out a framework for future inquiry through a set of ten questions. These questions cover fundamental issues, including: is the strategy working to stabilize markets and reduce foreclosures? What have banks done with the money? And is the public receiving a fair deal? The regular monthly reports have focused on Treasury’s initial response to these questions, as well as a valuation of investments made through capital purchases.
TARP and the Financial Stability Plan
I am often asked about my view of the TARP, which has become a source of legitimate criticism from all sides- was the TARP necessary and has it been effective? Let me start by saying that I always keep in mind where we were as a country last fall. The situation in the financial markets was dire. This means first that prudent public sector support was essential. And although it is clear in hindsight that the planning and implementation of the TARP should have been better, that is not the end of the story. We may never know how bad the situation would have become if the Treasury Department had not intervened. We may never be able to fully quantify the “what-if’s,” that series of highly unfavorable alternate outcomes that economists refer to as the counter-factual. But we do know that a potential collapse of the banking system was successfully averted.
And while we absolutely need a better set of metrics to gauge effectiveness and ensure accountability going forward, I believe that we are already on the right track. President Obama’s Financial Stability Plan addresses many of the practical shortcomings that have created a drag on the TARP to date. From stress-testing of major banks, to increased balanced sheet transparency and new terms for capital assistance, I expect that we will see a more targeted, efficient, and successful version of the Program in the near future.
Panel’s Special Report on regulatory reform
But evaluation of the TARP, which is ongoing, is only part of the Panel’s mission. Our most comprehensive work to date is the Special Report on regulatory reform. The Panel identified eight problems with recommendations for improvement:
- Identifying and regulating systemic risk. While the main report correctly identifies the need for a systemic regulator, the Panel did not reach consensus on how this should best be implemented. This was a point of special emphasis in the supplemental views that I issued as part of the report, and I agree with the G-30 and others who state that this is a job for the central bank. The Federal Reserve’s functions in setting monetary policy, overseeing bank holding companies, and serving as lender of last resort position it as the nerve center.
- Limiting excess leverage. This is an area of particular interest in international banking, especially as the US has- correctly in my view- held fast to the leverage ratio requirement for commercial banks. The Basel Committee, the SEC, and others should be evaluating lessons learned from the current crisis, to refine capital standards, create additional countercyclical measures, and better insulate the market from systemic shocks.
- Modernizing supervision of the shadow financial system. The Report recommends addressing regulatory gaps by expanding supervision of financial vehicles and instruments. I believe that the chartering of the ICE clearinghouse will go a long way in bringing order to credit default swaps, a key part of the derivatives market.
- Creating a new system for regulating consumer credit products. And here I would note that it is critical to keep the safety and soundness and consumer protection functions within one agency. A loan that is unfair to consumers is not prudent. Regulators need to look at an institution holistically, to detect emerging trends and have the right tools to respond. Too narrow a mission could lead to impractical regulations with unintended consequences. This enhanced consumer protection role would be consistent with the Federal Reserve’s current rule-making authority. Although the Fed has been slow to act in the past on consumer issues, the present crisis has served as a wake-up call.
- Creating executive pay structures that discourage excessive risk-taking. I wholeheartedly support proper accountability for firms that receive public support and we need common sense reforms to correct misaligned incentives. But American firms do need enough flexibility to recruit and retain top talent. There needs to be a fresh and critical reassessment by the private sector and governance boards of bonus and incentive programs, to ensure they are properly aligned with shareholder and public interests.
- Reforming the credit rating system. One approach is to create a credit rating review board along the lines of the Public Company Accounting Oversight Board, which was created under Sarbanes-Oxley to oversee auditors of public companies. Under this model, the board would not rate instruments, but would evaluate ratings agencies methodologies.
- Establishing greater coordination among global financial regulators. I am particularly encouraged by the work of international Supervisory Colleges, and hope that this model will be expanded to facilitate greater international cooperation.
- Taking steps to plan in advance for the next crisis. Even with all of these issues on our plate, it is never too soon to begin to prepare for the next crisis. We need to engage in robust “war-gaming” to identify emerging threats to financial stability and develop appropriate contingency plans.
Upcoming report on foreclosures
And the work of the Panel in regulatory reform and other key topics is continuing. The March report will focus on foreclosures, in particular: data collection and the need for standardization; drivers of default and re-default, especially the interaction between affordability and negative equity; and impediments to loan modifications.
The Panel’s purpose in this next report is not to endorse or propose any particular foreclosure program at this stage, but to identify factors that any successful program should address. While the report will provide Congress with facts to consider in policy decisions, I intend for it to be a practical resource for industry as well, to help in the design of loss mitigation strategies. I am looking forward to the release of the new guidelines for the Homeowner Stability and Affordability Program later this week. President Obama’s approach is very encouraging and builds on what we have done and have been calling for at state level, especially in the emphasis on affordability and greater access to loan performance data.
ConclusionI hope that you will continue to provide me with your feedback on regulatory reform, foreclosure prevention and the range of issues under consideration by the Panel. Your innovative ideas are an important part of the solution as we work together to stabilize the financial system. The innovative ideas of the IIB and your international perspective will have a positive impact and are an important part of the solution. Thank you.