Superintendent of Banks, Richard H. Neiman Addresses the Institute of International Bankers
July 28, 2009
Thank you, Larry, for that welcome and for the invitation to speak here this morning. I look forward every year to this program for foreign bank officers who have recently arrived in the US- international relationships through the IIB are one of the highlights of my responsibilities as Superintendent.
I would also like to thank CSBS for cosponsoring this event with the IIB. As I will discuss in my remarks, this is a truly eventful year for state banking and we value the partnership of CSBS in preserving a vital dual banking system.
In last year’s speech, I compared this orientation program for new bank managers to orientation for college. This year, it’s more like a college “homecoming” or reunion- other speakers include New York State Banking Department “alumnae” Dan Muccia, former First Deputy, and Sara Kelsey, former General Counsel. We have current Department staff on the agenda as well-
David Fredsall, Deputy Superintendent
Rosanne Notaro, Deputy Counsel
Warren Hochbaum, Assistant Deputy Superintendent
I would also like to thank David Fredsall for his many years of service to the Department. As some of you may know, he is retiring at the end of the summer. David is an outstanding example of everything that is right about the state banking system- he is an approachable, accessible regulator who has the versatility and expertise to understand the needs of the diverse institutions we supervise in New York, whether that is a one-branch community bank or an international firm engaged in the most complex capital markets transactions. And I have the same confidence in Regina Stone, currently our Deputy in the licensed financial services area, who will be taking over for David. You will have more opportunities to become acquainted with Regina in the coming months.
And in these next two days you will be hearing the latest news from our staff, the Federal Reserve, and other top industry experts. This program covers a wide range of topics, from the nuts and bolts of the exam process to the central role of the compliance function, including BSA/AML concerns. As a backdrop, I would like to provide an overview of current trends in regulatory reform, and will focus on two aspects-
The role of the states in the dual banking system; and,
Systemic risk regulation.
The role of the states in the dual banking system
The dual banking system of complementary state and federal supervision is one of the unique aspects of the US framework for financial services regulation. This may seem like a very different approach, especially if you are coming from a country with a more centralized model. But in the course of US history, we have found a unique equilibrium in dual oversight that confers the benefits of both a centralized and a decentralized approach.
We have the economic and competitive advantages of centralization through national banking and the Federal Reserve System. And at the same time, we have the flexibility and checks and balances of decentralization through state banking. An immediate example of the benefit of multiple regulators is in the area of consumer protection. States have historically taken a leadership role in consumer protection, and sounded the alarm on subprime lending issues- this crisis has proved the value of having more “cops on the beat.” Close interaction with local regulators provides benefits to banks as well, especially those with unique business models such as community banks, private/niche banks, or foreign banking organizations that facilitate international trade.
This summer has been a season of great importance to the preservation of the dual banking system. Two decisions, one from the Supreme Court in the case of Cuomo v. Clearinghouse and one from the Obama administration on regulatory reform, reinforce the important and continuing role of the states in financial services regulation.
Cuomo. At issue in the Cuomo case was the ability of state attorneys general to enforce valid or “non-preempted” fair lending and other consumer protection laws against national banks and their subsidiaries. The Supreme Court’s decision rests on distinguishing “visitation,” such as the authority to conduct examinations, from enforcement actions. The Court upheld the states’ sovereign authority to enforce non-preempted laws and removed the OCC’s unfettered discretion over consumer protection. I suspect future issues in the ongoing refinement of state-federal relations may center on distinguishing other forms of visitation from enforcement and on which laws are still binding or are preempted.
Obama regulatory reform plan. President Obama’s plan for regulatory reform would further roll back federal overreach in preemption. The Administration’s proposal calls for national minimum standards in consumer protection which would serve as a floor that states could choose to exceed. While I have serious reservations about the related proposal to bifurcate safety and soundness and consumer protection, the plan rightly elevates consumer protection issues and includes the kind of cooperative approach to state-federal shared oversight that I have long called for.
Systemic risk regulation
In addition to issues affecting state banking and consumer protection, another comprehensive area of reform involves promoting robust supervision and improving regulation of systemic risk- a centerpiece of President Obama’s reform proposal. The Administration’s plan has six main components-
Expanded authority for the Federal Reserve, to supervise all firms that could pose a risk to financial stability, whether or not they own a bank;
A new Financial Services Oversight Council of prudential regulators, that would identify emerging systemic risks and improve agency coordination;
Higher capital and other prudential standards for all firms, with even higher requirements for systemically significant firms;
A new National Bank Supervisor to combine the OCC and the OTS;
Elimination of the federal thrift charter; and
Registration of hedge fund advisers and other private capital pools with the SEC.
This proposal has generated much debate, particularly concerning the respective roles of the Federal Reserve and the Financial Services Oversight Council. Concerns center around three main issues-
Whether an expansion of the Fed’s role would create too great a concentration of power, especially in relation to the functional supervisors;
Whether an expansion of the Fed’s role would leave them stretched too thin in performing their existing mission in setting monetary policy; and
Whether the Council would have stand-alone authority or would be more of a coordinating and advisory body.
While I appreciate the thoughtful policy considerations that prompt these concerns, I believe the President’s proposal strikes the right balance. As the G-30 and others have also stated, systemic risk oversight is a job for the central bank.
The current crisis has demonstrated that the Fed is well-suited to harness the tools available to it to address systemic risk. The Fed has played a pivotal role in designing and implementing solutions to the crisis, including new liquidity facilities such as TALF, the Term Asset-Backed Securities Loan Facility that is helping to restart the secondary market. The Fed has also gained unprecedented insight into risks presented by non-banking as well as banking institutions. Their function in setting monetary policy, as well as supervising banking organizations and providing discount window facilities, strategically places the Fed at the heart of the nation’s regulatory nerve center.
But that doesn’t mean that the Fed can or should do the systemic risk oversight job by itself. I envision any expanded oversight for the Fed to be implemented in close cooperation with other financial regulators, including state banking and insurance departments. Based on the Banking Department’s current partnership with the Federal Reserve Bank of New York in supervising state member banks and foreign banking organizations, I have a high confidence level that this would be a winning solution. This could work in conjunction with an advisory Financial Services Oversight Council, and I agree with CSBS that the Council should include state representation.
A related issue in systemic risk oversight is reform to prudential standards, a point that is emphasized in the Obama plan. Practical examples of heightened standards are also detailed in the Special Report on Regulatory Reform that was issued in January by the Congressional Oversight Panel for the Troubled Asset Relief Program or TARP. I serve as a member of that Panel and am pleased that the Administration has addressed many of the action areas we identified.
In particular, I strongly affirm the Panel’s recommendations to strengthen rules around leverage and to revisit the Basel II framework. Therefore, I was also encouraged by the report issued last week by the Government Accountability Office (GAO), which likewise highlights the need to improve oversight of leverage at financial institutions and across the system.
I recommend President’s plan for regulatory reform, the Congressional Oversight Panel’s January report, and the GAO leverage report to you, as part of your “homework” for this orientation program. Addressing the pro-cyclical pressures that can fuel financial crises is a top priority for regulators world-wide. If there are flaws in our approach, particularly in the use of risk models, we need to face that sooner rather than later. Perhaps during your time here you will pick up not only our “New Yawk” accent, but also a heightened appreciation for the merits of applying an American-style non-risk weighted leverage ratio to international capital standards.
This issue of leverage actually brings me back to my opening theme on the benefits of the multi-layered regulatory system in the US. Among the federal regulators, it was the FDIC who most clearly recognized the importance of a core leverage ratio- a feature of our US implementation of Basel II that has passed its own trial by fire.Once again, having the benefit of different regulators with diverse perspectives on the issue contributed to what I believe was the right outcome. And the outcome of our efforts to prevent future financial crisis will also be strengthened by greater international cooperation. Your presence here today and the work that you will be doing in the realm of global finance are part of that effort, and I welcome you to this orientation program and to our wonderful city of New York.