Financial Regulatory Reform: Frequently Asked Questions

• Why do we need financial regulatory reform?
• Is financial reform a top priority for the Administration?
• How does the Administration’s reform proposal ensure that a crisis like this won't happen again?
• Does the Federal Reserve have to be the systemic risk regulator? What about a Council?
• Does the Administration’s reform proposal address the “Too Big To Fail” problem?
• Why do we need a new agency to provide adequate consumer protection?
• What would the Consumer Financial Protection Agency mean for innovation and new financial products?
• What does the Administration’s regulatory reform plan mean for community banks?

Why do we need financial regulatory reform?

This September marked the one-year anniversary of the most devastating month in modern financial history. In the three months that followed, American families lost $5 trillion in wealth, and we continue to struggle through a recession that has cost millions of jobs.

The signs of economic recovery thus far are promising, but we cannot let the beginning signs of normalcy lead to complacency. The crisis occurred, at least in part, because our regulatory system was broken. We must act now to reform our financial system. We will not have a meaningful recovery or sustainable growth that benefits the American people unless we reform our financial system. We cannot wait for the next crisis.

Is financial reform a top priority for the Administration?

The President has made it clear that passing financial regulatory reform this year is a top priority for this Administration. Chairman Dodd and Chairman Frank have both committed to passing legislation by the end of the year, and we are on path to do just that. As the President has said many times before, this Administration does not have the luxury of time because the American people do not have the luxury of time. It’s critical that we establish new, strong rules of the road now, before the lessons we have learned through this crisis are forgotten and before the next threat to our financial stability strikes. While there are encouraging signs in the financial system, a lasting recovery will only be possible if we build a new foundation for long-term, sustainable growth.

How does the Administration’s reform proposal ensure that a crisis like this won't happen again?

Financial activity involves risk, so it will not be possible to prevent all future threats to financial stability. However, we can take steps to make crises less likely and far less damaging. The Administration’s plan will close loopholes and impose tougher standards to make the system more stable, especially for those firms that pose the most risk to the financial system and our overall economy. It will establish and enforce clear rules of the road with respect to credit cards, mortgages and investment accounts to create a financial system that protects and works for American families.

And the plan will create better tools to respond to crises when they occur. These tools will work to protect American taxpayers and the economy from the failure of large, interconnected institutions and provide the government with options other than bailout or financial catastrophe.

Finally, in today’s global economy, the Administration understands that our economy does not exist in a vacuum and will continue to work to ensure that as we adhere to new standards and rules of the road, the rest of the world follows suit. It is in all our interests to protect the stability of the global economy.

Does the Federal Reserve have to be the systemic risk regulator? What about a Council?

In critical markets, like those for derivatives and for asset-backed securities, the Securities and Exchange Commission and the Commodity Futures Trading Commission will take the lead. The Federal Reserve will be responsible for holding company regulation, as it is today, but with tougher standards and higher capital requirements on the largest, most interconnected firms.

The Financial Services Oversight Council will have the critical responsibility of identifying emerging threats and coordinating a response – because we know that threats to our economy can emerge from any corner of the financial system. The Council is required to report to Congress each year on these risks and threats and to coordinate action by individual regulators to address them.

Does the Administration’s reform proposal address the “Too Big To Fail” problem?

Yes. It is critical to recognize the potential risks large, complex, interconnected firms present, and that is why the Administration’s plan includes a series of reforms to tackle these issues head on.

First, the Administration’s plan will impose tougher standards for every firm in the financial system, including higher capital requirements. And for those firms that pose the most risk, there are even higher capital requirements. Second, the plan will close loopholes and tighten the regulatory structure to ensure that firms are regulated consistently and in their entirety. Third, we will provide better tools to be used in a crisis to wind down a troubled firm in ways that protect taxpayers and enable shareholders and creditors to take losses. Finally, we support the diversity and strength of our financial system by proposing reforms that will level the playing field for the thousands of community banks across the country by forcing non-bank firms to play by the same rules that banks have had to follow all along.

It would be easy to simply say that the government is going to cap the size of firms, but given the scale and complexity of our economy, that is not a realistic or desirable option. Moreover, if the line were to be drawn in the wrong place, it could seriously impede America’s ability to compete abroad.

Why do we need a new agency to provide adequate consumer protection?

Under the current system of consumer protection, there is no accountability in the federal government for protecting responsible consumers.  Seven federal agencies each have a fragment of the federal government’s authority to protect responsible consumers.  With so many agencies, no one can be held accountable.  There is also a huge loophole in federal oversight authority: it covers banks but it does not cover the mortgage brokers, finance companies, payday lenders, and other firms that are just as responsible, if not more so, for consumer protection problems.  With no accountability and huge loopholes, it is no wonder that unfair and misleading credit card and mortgage practices spread so widely they helped cause the biggest financial crisis since the Great Depression.

The status quo failed and we must change it – and not simply by making tweaks around the margins.  It’s critical that we make the federal government accountable for protecting responsible Americans from unfair or misleading practices, enforcing clear rules of the road in the financial services marketplace, and helping restore confidence in the financial system.  The Obama plan gathers existing consumer protection authorities in one agency and closes the gaping loophole for banks, mortgage brokers, finance companies, and payday lenders.  This agency will end misleading mortgage practices and credit card fee traps and give responsible consumers control over their financial decisions.

What would the Consumer Financial Protection Agency mean for innovation and new financial products?

Through creating and enforcing clear, common-sense rules of the road, the CFPA will encourage innovation and restore consumer control over their own financial decisions.

The lack of clear rules in the past has meant that consumers have been the victims of the wrong kind of innovation – tricks, traps and shady practices. The firm that could make its product look better by hiding the real costs won. This encouraged firms to hide the true costs of their products in order to lure unassuming consumers, resulting in "teaser" rates on credit cards and mortgages with devastating rate increases.

The CFPA will make sure that consumers get information that is simple, transparent and accurate and allow them to make the informed decisions that are best for them. The CFPA will help promote innovation allowing responsible service providers to thrive with fair competition on a level playing field.

What does the Administration’s regulatory reform plan mean for community banks?

The thousands of community banks across the country are critical to our nation’s economy. Yet over the past two years, many community banks have been hit hard by the financial crisis and the recession that followed. The most important impact of the Administration’s plan will be to create a more stable financial system that is less vulnerable to crisis. This means closing loopholes that allowed risky activities to avoid serious supervision or regulation, and it means tougher standards for large, interconnected, highly-leveraged firms that pose the most risk. Our reforms will help eliminate the funding advantage of the largest firms and give community banks the level playing field they deserve.  The Obama plan will reform secondary markets and help keep the financial system stable so that small banks have access to funding to make sound loans.”

The Obama plan also assures community banks a level playing field by closing loopholes that their competitors have exploited.  For the first time, the federal government will enforce clear and consistent rules on the payday lenders, finance companies, and mortgage brokers that compete with community banks.  That will be the job of the Consumer Financial Protection Agency.  This agency will be accountable for setting clear rules of the road for the whole marketplace. 
The CFPA will have a mandate to spend more of its time on institutions that pose more risks to consumers, resulting in proportionally less oversight to well run community banks.  And community banks will not have to pay  any more under our plan than they do today.