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Geithner Signals Regulatory Shift

Author: Lee Hudson Teslik, CFR.org
March 25, 2009

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[Note: This is a news briefing of a March 25 meeting at the Council on Foreign Relations featuring U.S. Treasury Secretary Timothy Geithner. The full transcript of the meeting is available here.]

Geithner at CFRNEW YORK, March 25 -- U.S. Treasury Secretary Timothy Geithner promised enhanced consumer and investor protections and pledged a broad new framework for government oversight of systemic risks to the national and global economy.

Speaking at the Council on Foreign Relations, Geithner promised to draw on lessons learned in the current crisis to build "a more modern framework of regulation," saying more details would be announced on March 26. One of the major lessons of the current crisis, he said, is that the regulatory regimes largely devised after the Great Depression of the 1930s did not account for the havoc that important non-bank financial institutions, like the insurance conglomerate AIG, could create for the broader economy if they failed.

In an hour-long session that included a speech and a question-and-answer session, Geithner promised to give the government the tools to limit risk-taking at systemically-relevant financial institutions, including both banks and "non-banks."

"The framework will significantly raise the prudential requirements, once we get through the crisis, that our largest and most interconnected financial firms must meet in order to ensure they do not pose risks to the system," Geithner said.

Geithner's remarks followed congressional hearings on March 24 in which both Geithner and Federal Reserve Chairman Ben Bernanke called for the formation of a new governmental body to monitor financial institutions and systemic risk. They also argued that regulators should be given the power to seize control of systemically-significant "non-bank" entities, such as the beleaguered AIG, if they fall into financial distress.

Stabilizing Finance in the Near-Term

Beyond bringing non-bank financial players into the regulatory fold, Geithner said the Treasury will be proposing strong new regulations to protect consumers and investors against financial fraud and the sorts of irresponsible investment behavior that led to the subprime housing crisis.

These efforts will fall under the purview of the "Financial Stability Plan," which Geithner first rolled out in February. Responding to questions, Geithner addressed how this plan has functioned in practice and what market-watchers can expect in weeks to come.

Timeline: Global Economy in Crisis

He cautioned that some of the infrastructure the Treasury is setting up to get bad assets off the books of U.S. banks through a new public-private investment program will "take some time" and demurred when asked what volume of toxic assets he expects to see in the near future. "You can't measure [the success of the plan] solely on the basis of how much activity you get through these funds," he said, noting that the "backstop" of government support provides an incentive to change behavior in its own right. "You will be able to see effects on liquidity in the markets and on pricing and spreads, even if you see gradual takeup in terms of relative use of these things."

He elaborated on the "stress test" being administered at U.S. banks through the Financial Stability Plan, saying it is "not a pass-fail test" but rather a look at what sorts of capital institutions might be needed to get through a deep recession, as a means of contingency planning.

International Questions and the G-20

In a lengthy Q&A session following his remarks, Geithner turned to international financial questions. He said that efforts to get credit flowing and improve regulatory infrastructure will have to be international in nature. He addressed what he wants to come out of the April 2 G-20 meetings in London, which President Barack Obama will also attend, saying he hopes for "broad coordinated action to help bring recovery about, not just on fiscal and monetary policy."

Looking ahead to the meetings, Geithner took issue with the idea that the United States and the European Union were divided on the level of stimulus necessary, saying the EU is "fundamentally with us" in its approach to the crisis. The European Union president, Mirek Topolanek of the Czech Republic, rejected calls for Europe to mimic U.S. stimulus spending at recent EU meetings, echoing the position of member states like Germany. Geithner didn't specify firm targets for stimulus but said "the important thing is for people to say that they're going to do what it takes and they're going to make sure it's sustained over a period of time that matches the likely duration of the recession."

Geithner also said he hopes a "very forceful package" of commitments to bolster international institutions like the International Monetary Fund, as well as broad agreement on a global regulatory reform agenda, will come out of the G-20 summit. He expressed optimism for these outcomes. Describing recent G-20 finance minister meetings, he said: "You know, I sat around these tables for many years in my past, and...I've not been at those meetings before with that level of common conviction on not just the basic diagnosis but what it's going to take and the details of what's going to be required."

Asked about the future role of the U.S. dollar, following comments from China's central bank governor that the world needs a new international currency, Geithner said he interpreted the comments to be a call for expanded Special Drawing Rights--the currency substitute used by the IMF--adding that Washington "is actually quite open to that." Bloomberg reports that this comment roiled currency markets, sending the dollar tumbling for a short period. Later in the talk, however, Geithner reiterated his view that "the dollar remains the dominant reserve currency and is likely to remain that for a long period of time," prompting the dollar to surge, making up its earlier losses.

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