U.S. Treasury Secretary Timothy Geithner has provided a list of Wall Street reform’s accomplishments as GOP presidential candidates have vigorously assailed the Dodd-Frank legislation of 2010, the impetus for much of the financial system’s overhaul.
Republican presidential contenders Mitt Romney and Newt Gingrich have repeatedly called for the repeal of Dodd-Frank as a cure for the housing market crisis. In a Florida debate last month, both cited the reform law’s regulatory burden on financial institutions.
Romney said that Dodd-Frank has “made it harder for banks to re-negotiate mortgages to help people get out.”
Gingrich said it has “let the biggest banks to get bigger.” He even suggested that the housing market would start to recover the day after Dodd-Frank was to be repealed.
Geithner’s response: If they want to go back to 2008 and 2009, the peak of the financial crisis, then let them repeal it.
“If you want to choose that future, then you should be in favor of the repeal of the law,” he told reporters during a news conference Thursday.
Geithner addressed financial reform on the first meeting day of yet another Dodd-Frank by-product, the Financial Stability Oversight Council, a panel of regulators headed by Geithner that will monitor the soundness of the financial system and take action against the largest firms if the U.S. economy is threatened.
“The financial system is getting stronger and safer,” Geithner said in prepared remarks. “Much of the excess risk-taking and careless and damaging financial practices that caused so much damage have been forced out of the financial system. These gains will erode over time if we are not able to put our full reforms into place.”
Geithner said financial reform has forced the largest firms to raise a substantial amount of new capital, to reduce the size and scope of their businesses where necessary and build stronger “cushions of liquidity.”
“We moved quickly to wean the financial system off the emergency programs we were forced to put in place in the crisis to protect the economy from broader financial collapse,” Geithner said. “Banks have increased common equity by more than $350 billion since 2009.”
Here’s an overview of Geithner’s reform highlights:
Housing finance reform:
This year, Geithner said the administration will build the foundation for reforms to the mortgage market in the United States, including a path for winding down Fannie Mae and Freddie Mac, the two mortgage financing giants subsidized by taxpayers. “We expect to lay out more detail around approaches to reform in the spring, and we plan to begin exploring options for legislation more intensively…”
Dodd-Frank’s Consumer Financial Protection Bureau has already improved disclosure on mortgages and credit cards, including consolidation of the two required mortgage disclosure forms into one, and developed new standards for a qualified mortgage. “Consumers are already relying on the CFPB to help settle disputes with financial companies, and the CFPB is making sure that all financial companies—from big banks to payday lenders—are playing by the same rules,” Geithner said.
Protections against the “too big to fail” institutions:
There are now tougher limits on the size of financial institutions, 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, a “resolution authority” that prohibits bailouts for private investors, protects the taxpayer, and forces the financial system to bear the costs of future crisis.
Banks now face a much tougher set of limits on how much risk they can take. New rules on capital and liquidity will limit leverage by requiring banks to hold more financial reserves against risk and to fund themselves more conservatively.
The derivatives markets are coming under a comprehensive framework of transparency requirements, margin rules, and other safeguards. These reforms are designed to move standardized contracts to clearing houses and trading platforms, which should lower costs to those who use these products.