Since its inception in 2000, the Forum has supported and worked to achieve sensible financial regulatory reform that protects consumers, investors, depositors, and shareholders, while also ensuring that our financial markets are competitive, innovative, and able to provide the capital necessary to fuel economic growth and job creation.
The U.S. financial sector has recently undergone the most significant legislative, regulatory, and internal overhaul in modern history. A number of significant steps were taken to improve the safety and soundness of the financial industry, reduce the likelihood of future market turmoil, and boost the long-term strength of the U.S. economy. The industry is strongly committed to ensuring that no institution is too-big-to-fail and ensuring that taxpayer dollars are never put at risk in a future crisis.
On July 21, 2010, President Barack Obama signed into law the sweeping new financial regulatory reforms known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (Dodd-Frank). Included in the legislation (summary here – full text here) is the creation of a Financial Stability Oversight Council, comprised of relevant financial regulators and chaired by the Treasury Secretary, which monitors the stability of our nation’s financial system and identifies and responds to emerging risks and potentially troublesome systemic trends. The legislation also seeks to end “too big to fail” by instituting a resolution mechanism, (orderly liquidation authority) to give federal authorities the ability to seize and wind down a distressed, failing financial firm in an orderly way. Most derivatives contracts are now cleared on centralized exchanges, subject to greater transparency requirements, and backed by higher capital. Other notable aspects of the legislation include the creation of the Federal Insurance Office, promulgation of the “Volcker Rule,” which prohibits bank holding companies from engaging in proprietary trading and places restrictions on those firms’ ownership of hedge funds and private equity, and strict new rules regarding the Federal Reserve’s ability to provide assistance to financial firms.
As implementation of this complex law moves forward, it is crucial that policymakers and regulators charged with finalizing and enforcing hundreds of new regulations under Dodd-Frank carefully consider any unintended consequences of some of the well-intentioned reforms, especially those that could slow the economic recovery or the pace of job creation. Regulatory consistency, as well as the cumulative impact of regulatory reforms, must remain top priorities, as all stakeholders want sensible reform that strengthens our regulatory system, accelerates economic growth and job creation, and preserves the global competitiveness of American markets and financial institutions.
Large financial institutions have also worked alongside regulators and Congress to enact numerous reforms to make the financial system stronger, more transparent, more resilient, and more accountable. Specifically:
- Capital, which protects banks from unexpected losses, has doubled since 2009;
- Liquidity, holdings of cash and liquid securities, has also doubled since 2009;
- Leverage has been reduced, in some cases by half;
- Asset quality is far stronger, with problem loans and loan losses falling to their lowest levels since early 2008;
- Risk management, internal controls, and governance procedures have been significantly enhanced;
- Compensation structures at most banks have been reformed to closely align the personal incentives of bank employees with the long-term performance and safety and soundness of the employing institution;
- Financial institutions have passed multiple stress tests administered by the Federal Reserve to ensure their ability to endure severe economic conditions; and,
- Banks have submitted ‘living wills,’ which detail the structure of each banking company as well as how companies could be dismantled in the event of failure.
For these reasons, the nation’s financial institutions, and broader financial system, are far stronger and more resilient than before the crisis.
While other important financial reforms are still to be addressed, such as reform of the housing GSEs and agreement on globally-coordinated capital standards, the progress made on Dodd-Frank implementation and industry-initiated safety and soundness improvements are important steps toward ensuring American financial stability and continued economic recovery. The Forum will continue to work constructively with regulators to create a financial supervisory framework that ensures institutional safety and soundness and systemic stability, while also meeting the financial needs of American businesses, workers, consumers, and investors.