Remarks by
FDIC Chairman Sheila C. Bair
Financial Regulatory Reform
The Way Forward to the Consumer
Federation of America,
Financial Services Conference,
Washington, DC
December 3, 2010
I am honored and delighted to be here. Throughout my public career, I have always
viewed consumer protection as the core of what I do. And I have long admired your
effective advocacy and all that you have accomplished. Regardless of the issue,
housing finance, consumer credit, payday lending, auto insurance, there is no stronger
voice for the hardworking public than the Consumer Federation.
Perhaps your biggest accomplishment came just a few months ago, when you helped
us win passage of the Dodd-Frank financial reform act, closing the books on the
doctrine of Too Big To Fail and creating a new consumer watchdog for financial
products. Our two years of hard work and persistence paid off, and it is now up to us to
ensure that the new law is implemented strongly and fairly.
What I would like to do this morning is outline the rationale for the new reforms and the
way forward. Aside from the CFPB, many of the reforms might not at first-blush appear
to be relevant to consumers, such as the FDIC's new resolution authority for large
institutions or the new Financial Stability Oversight Council. I admit they can be arcane
and as difficult to understand as the terms on your credit card statement.
But in fact most, if not all of the reforms, are vital to protecting the financial well-being of
every American and the broader public good – whether it is preventing another massive
bailout shouldered by all taxpayers or preventing a foreclosure that should have been a
modification for a family.
Level Playing Field Benefits Consumers
The mortgage crisis points to the need for leveling the playing field between banks and
non-bank providers for consumer lending. The lack of sensible, consistent mortgage
lending standards and consumer protections in the run-up to the crisis ended up
destabilizing housing markets and the entire financial system. This "race to the bottom"
mentality imposed large losses on banks and non-banks alike, and imposed long-term
damage on household balance sheets and consumer confidence.
The CFPB provides a real opportunity to simplify consumer rules and make them work
in the interest of consumers. It subjects non-bank financial providers to more rigorous
rules and examinations while enhancing the competitive position of responsible lenders,
FDIC Chairman Sheila C. Bair
Financial Regulatory Reform
The Way Forward to the Consumer
Federation of America,
Financial Services Conference,
Washington, DC
December 3, 2010
I am honored and delighted to be here. Throughout my public career, I have always
viewed consumer protection as the core of what I do. And I have long admired your
effective advocacy and all that you have accomplished. Regardless of the issue,
housing finance, consumer credit, payday lending, auto insurance, there is no stronger
voice for the hardworking public than the Consumer Federation.
Perhaps your biggest accomplishment came just a few months ago, when you helped
us win passage of the Dodd-Frank financial reform act, closing the books on the
doctrine of Too Big To Fail and creating a new consumer watchdog for financial
products. Our two years of hard work and persistence paid off, and it is now up to us to
ensure that the new law is implemented strongly and fairly.
What I would like to do this morning is outline the rationale for the new reforms and the
way forward. Aside from the CFPB, many of the reforms might not at first-blush appear
to be relevant to consumers, such as the FDIC's new resolution authority for large
institutions or the new Financial Stability Oversight Council. I admit they can be arcane
and as difficult to understand as the terms on your credit card statement.
But in fact most, if not all of the reforms, are vital to protecting the financial well-being of
every American and the broader public good – whether it is preventing another massive
bailout shouldered by all taxpayers or preventing a foreclosure that should have been a
modification for a family.
Level Playing Field Benefits Consumers
The mortgage crisis points to the need for leveling the playing field between banks and
non-bank providers for consumer lending. The lack of sensible, consistent mortgage
lending standards and consumer protections in the run-up to the crisis ended up
destabilizing housing markets and the entire financial system. This "race to the bottom"
mentality imposed large losses on banks and non-banks alike, and imposed long-term
damage on household balance sheets and consumer confidence.
The CFPB provides a real opportunity to simplify consumer rules and make them work
in the interest of consumers. It subjects non-bank financial providers to more rigorous
rules and examinations while enhancing the competitive position of responsible lenders,
including many community banks, who are trying to do the right thing by their
customers.
I welcome the addition of the CFPB Director to the FDIC Board. This will help to not only
enhance the FDIC's strong reputation for consumer protection, but also give the CFPB
some insights into the wide range of depository institutions with retail operations.
Dodd-Frank Implementation
The financial crisis also has exposed other critical flaws in how our financial system
operated and was regulated. The reforms authorized under the Dodd-Frank Act include
far-reaching changes to restore market discipline, internalize the costs of risk-taking,
and make our regulatory process more attuned to systemic risks.
A key reform is the new resolution authority for large bank-holding companies and
systemically important non-bank financial companies. This new authority directly
addresses the dilemma we faced in the fall of 2008, when a number of these companies
ran into serious trouble.
We all saw the result of the Lehman bankruptcy, which threw global financial markets
into chaos. In contrast, the FDIC regularly carries out a prompt and orderly resolution
process using its receivership authority for insured banks and thrifts. The Dodd-Frank
Act for the first time gives the FDIC a similar set of receivership powers to close and
liquidate systemically-important financial firms that are failing.
Practical Significance of Ending Too Big To Fail
Let me briefly describe to you the practical significance of this new resolution authority.
In the old world of Too Big To Fail, risk taking was subsidized. Systemically-important
companies took on too much risk because the gains were private while the losses are
absorbed by the government.
Market discipline failed to rein in the excesses at these institutions because equity and
debt holders – who should rightly be at risk if things go wrong – enjoy an implicit
government backstop. This skewing of financial incentives inevitably leads to a
misallocation of capital and credit flows.
During the boom, too much credit was directed to single-family housing, when it might
have been put to better use in other sectors. And much of that credit was structured in
ways that did not meet the long-term needs of household borrowers.
But implementing the new resolution authority and ending Too Big To Fail is a game
changer in terms of economic incentives. It is the key to restoring market discipline on
the nation's largest financial institutions and better aligning their financial incentives to
control risks. Capital and credit will be allocated more efficiently. And taxpayers will no
longer be on the hook when these companies get it wrong.
customers.
I welcome the addition of the CFPB Director to the FDIC Board. This will help to not only
enhance the FDIC's strong reputation for consumer protection, but also give the CFPB
some insights into the wide range of depository institutions with retail operations.
Dodd-Frank Implementation
The financial crisis also has exposed other critical flaws in how our financial system
operated and was regulated. The reforms authorized under the Dodd-Frank Act include
far-reaching changes to restore market discipline, internalize the costs of risk-taking,
and make our regulatory process more attuned to systemic risks.
A key reform is the new resolution authority for large bank-holding companies and
systemically important non-bank financial companies. This new authority directly
addresses the dilemma we faced in the fall of 2008, when a number of these companies
ran into serious trouble.
We all saw the result of the Lehman bankruptcy, which threw global financial markets
into chaos. In contrast, the FDIC regularly carries out a prompt and orderly resolution
process using its receivership authority for insured banks and thrifts. The Dodd-Frank
Act for the first time gives the FDIC a similar set of receivership powers to close and
liquidate systemically-important financial firms that are failing.
Practical Significance of Ending Too Big To Fail
Let me briefly describe to you the practical significance of this new resolution authority.
In the old world of Too Big To Fail, risk taking was subsidized. Systemically-important
companies took on too much risk because the gains were private while the losses are
absorbed by the government.
Market discipline failed to rein in the excesses at these institutions because equity and
debt holders – who should rightly be at risk if things go wrong – enjoy an implicit
government backstop. This skewing of financial incentives inevitably leads to a
misallocation of capital and credit flows.
During the boom, too much credit was directed to single-family housing, when it might
have been put to better use in other sectors. And much of that credit was structured in
ways that did not meet the long-term needs of household borrowers.
But implementing the new resolution authority and ending Too Big To Fail is a game
changer in terms of economic incentives. It is the key to restoring market discipline on
the nation's largest financial institutions and better aligning their financial incentives to
control risks. Capital and credit will be allocated more efficiently. And taxpayers will no
longer be on the hook when these companies get it wrong.