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5/12/2020 Deputy Secretary Neal S. Wolin’s Remarks at the Independent Community Bankers Association's (ICBA) 2011 Washington Policy Summit U.S. DEPARTMENT OF THE TREASURY Press Center Deputy Secretary Neal S. Wolin’s Remarks at the Independent Community Bankers Association's (ICBA) 2011 Washington Policy Summit 5/2/2011 Last summer, the President signed into law a comprehensive set of reforms to the financial system. These reforms were enacted in the wake of a devastating financial crisis. That crisis was brought about by fundamental failures in our financial system. The failures were many and they were varied. In the years leading up to the crisis, firms took on risks they did not fully understand and used legislative loopholes to operate some businesses without oversight, transparency, or restraint. Profits and compensation were all too often tied to short-term gains without proper consideration of long-term consequences. Across the country, many Americans took on more debt than they could afford, and many firms encouraged them to do just that. In Washington, regulators did not make full use of the authority they had to protect consumers and limit excessive risk. And policymakers were too slow to fix a broken system. The crisis erased trillions of dollars of wealth, put Americans out of work across the country, and shook the foundations of our entire economy. And the crisis exposed the fundamental flaws in our financial system. In the aftermath, the President was determined to reform that system. There was no alternative to reform. Not only our economy but also the lives and livelihoods of tens of millions of American families were devastated by the crisis. And it was manifestly clear that the financial system that led us to the edge of the abyss was broken and needed to be fixed. The system we had favored short-term gains for individual firms over the stability and growth of the economy as a whole. The system we had was weak and susceptible to crisis. And the system we had left taxpayers to save it in times of trouble. We had no choice but to build a better, stronger system. That’s why we proposed, Congress passed, and the President signed into law a sweeping set of reforms to do just that. The Dodd-Frank Act creates a comprehensive and robust regulatory framework. The statute creates a structure for the government to monitor and respond to systemic risk. It makes clear that no firm will be considered “too big to fail.” It requires regulators to impose heightened prudential standards on large, interconnected financial firms. It provides for the comprehensive regulation of the derivatives markets for the first time. And the statute establishes a single agency dedicated to protecting consumers. For the past nine months, we have been hard at work implementing these and many other critical reforms contained in Dodd-Frank. Regulators are moving quickly but carefully. We are seeking public input. And we are focused on getting the details right. In doing so, we are also making sure that our efforts are well-coordinated. Our financial regulatory system is built on the independence of regulators, and given the importance of Dodd-Frank implementation, independent regulators will have different views on complicated issues – working through differences is an important part of getting the substance right. At the same time, Dodd-Frank forces regulators, more than ever before, to work together to close gaps in regulation and to prevent breakdowns in coordination – this is a central change brought about by the law. Beyond joint rules and consultation required on specific rulemakings, we have been and will continue working together where issues cut across multiple agencies, to make the pieces of reform fit together in a sensible, coherent way. As we proceed, however, there are many critics who are attempting to slow down or defund implementation, or who seek to repeal the statute entirely. I want to remind them that in the absence of the proper protections – in effect, in the absence of the protections that this legislation puts in place – our system descended into a crisis that had tremendous costs to businesses, to the economy, and to the American people. If we had not moved to reform the system, we would find ourselves still exposed to a cycle of collapses and crises, with potentially devastating repercussions for the nation. We can’t afford to let that happen. The price of reform is a small one compared to the cost of crisis. https://www.treasury.gov/press-center/press-releases/Pages/tg1154.aspx 1/3 5/12/2020 Deputy Secretary Neal S. Wolin’s Remarks at the Independent Community Bankers Association's (ICBA) 2011 Washington Policy Summit We must invest now in building a strong, stable system. There is no responsible alternative, because if we don’t invest in reform now, we run the unacceptable risk that we will pay dearly later – in jobs, in lost wealth, in foreclosed homes, and in the soundness and security of our entire economy. You here at ICBA know that as well as anyone. As community bankers, you understand the devastation of the financial crisis. You know the families who have lost their homes. You know the small business owners who have closed up shop. And many of you – like those businesses – have suffered from the effects of a financial crisis that you did not cause. Nevertheless, some have expressed concern that Dodd-Frank will hurt small banks. In fact, the lawmakers who drafted the legislation took great care to protect and strengthen the country’s rich network of community banks. It’s critical that we avoid the concentration that exists in the banking sectors of so many other countries, which are dominated by just a handful of very large institutions. Our system, which relies on nearly 8,000 community banks, is better equipped to meet the needs of consumers and small business owners than the more concentrated banking systems of other countries. By building relationships with their customers and their communities, community banks play a critical role in local economies, supporting economic growth and job creation by providing credit to consumers and small businesses across America. The authors of Dodd-Frank recognized the importance of community banks and understood that they did not cause the crisis. Accordingly, the statute focuses on constraining risk at the largest institutions and on closing gaps in regulation for activities, like derivatives trading, which are not central to the business of community banks. The legislation does, however, contain several important provisions that put community banks on more equal footing with their competitors and strengthen their important role in our financial system. First, Dodd-Frank raises deposit insurance protection to $250,000, providing greater protection for one of community banks’ core sources of funding. Second, Dodd-Frank ensures that the cost of deposit insurance is borne by the institutions that engage in the riskiest activities and that, consequently, benefit the most from its protection. The statute requires insurance premiums to be based on total liabilities, which are a more accurate reflection of risk than deposits alone. As a result, the premium burden will shift away from smaller institutions to larger, riskier banks. Third, Dodd-Frank provides that large financial institutions will be subject to heightened prudential standards, including requirements to hold more and higher-quality capital and maintain larger liquidity buffers. Requiring larger institutions to hold more capital and liquidity will make these firms less likely to fail and help them withstand financial stress. These higher prudential standards will force large institutions to bear the costs of the risks they create and will therefore discourage them from becoming so big in the first place. Community banks, which do not pose the same type of risks to the system as large firms, will not be subject to the same obligations. Fourth, Dodd-Frank levels the playing field between small banks and nonbank financial service providers, such as payday lenders and independent mortgage brokers. A major failure of our regulatory system prior to the crisis was that these institutions were allowed to compete against community banks for the same customers without playing by the same rules. To remedy this imbalance, Dodd-Frank gives federal regulators the ability to regularly examine nonbank financial services providers and to prohibit any unfair and deceptive practices they may be engaging in. Fifth, Dodd-Frank works to protect small banks from excessive supervisory burdens. The regulator responsible for monitoring the safety and soundness of community banks will also bear responsibility for enforcing rules promulgated by the new Consumer Financial Protection Bureau. The coordination will allow small banks to avoid multiple exams. Furthermore, the CFPB implementation team is also working to consider the impact of proposed regulations on the smallest banks and credit unions and, in certain cases, to establish panels to seek direct input from such institutions before proposing a regulation. More broadly, CFPB staff is already in contact with small banks and credit unions to make certain that the perspectives of small banks and credit unions are well-represented within the consumer agency. Sixth, and finally, the Dodd-Frank Act reduces the unfair funding advantages enjoyed by the largest institutions prior to the crisis by setting out a process for those institutions to be wound down, broken apart, and liquidated when facing imminent failure. Under the new process, culpable management will be replaced, creditors will suffer losses, and shareholders will be wiped out. And large institutions – not community banks or taxpayers – will pay for the costs. I understand that there is concern that the reforms in Dodd-Frank will be overly burdensome or costly for small banks. But regulators are working to strike the right balance. They’re working to making sure that regulations protect the system but don’t hurt small banks or prevent them from doing their job. And at the same time, they are searching for ways to make regulations better, less duplicative, and less burdensome. Whatever the concerns, you here at ICBA have recognized the importance of reform. Cam Fine has said that financial reform represented a “huge policy shift and bodes well for community banks.” But it’s important to couple these reforms that ensure the soundness of our financial system with efforts to stimulate job creation, competitiveness, particularly for small businesses. As you know, community banks are key lenders to small businesses. That's why last September, the President signed into law the Small Business Jobs Act – legislation that ICBA was instrumental in supporting and moving through Congress. Alongside expanded SBA programs, extended guarantees, and tax cuts, the statute includes two important Treasury Department programs – the Small Business Lending Fund and the State Small Business Credit Initiative – programs that will help you lend to the businesses in your communities who want to grow and create jobs. The SBLF is a multibillion dollar fund, designed exclusively for community banks and loan funds, that will to help restore the flow of credit to small businesses. The Fund encourages lending by providing these community banks with capital at rates as low as 1 percent. A participating bank receives all of the money from Treasury up-front. Banks with under $1 billion in assets can get 5 percent of their risk-weighted assets in funding. For banks between $1 and $10 billion, it’s 3 percent of risk-weighted assets. Here’s how it works: Treasury charges a fee – a dividend rate – for capital from the Fund. That rate starts no higher than five percent, and may be lower. After that, the more small business lending a bank does, the lower the cost of the funding becomes – all the way down to 1 percent for banks that increase their lending by 10 percent or https://www.treasury.gov/press-center/press-releases/Pages/tg1154.aspx 2/3 5/12/2020 Deputy Secretary Neal S. Wolin’s Remarks at the Independent Community Bankers Association's (ICBA) 2011 Washington Policy Summit more. For increases that are smaller, banks can receive rates between 2 and 4 percent. The structure provides banks with a simple but powerful incentive to increase their lending and the confidence to move forward. The reduced cost of funding, as well as accompanying revenues from origination fees and interest, will allow banks to offer better rates to creditworthy borrowers, encouraging them to come off the sidelines; to expand the bank’s marketing and outreach efforts, and identify businesses in their communities that may be seeking credit; and, perhaps, to take a “second look” at businesses that may have sought loans in the past. Now, on top of the lending fund, the Small State Small Business Credit Initiative is expected to spur up billions in small businesses lending. The state initiative presents a low cost to taxpayers with a high impact for small businesses: to obtain the federal funds, each state demonstrates how it can leverage every 1 dollar of public investment into 10 dollars of new small business lending or investing. Our $1.5 billion funding commitment nationwide is expected to spur $15 billion or more in additional small business financing. We’ve already announced funding for several states. These states expect to use their funding to spur $2.8 billion or more in new small business financing. We’re working with regulators and states to get these programs up to full capacity as soon as possible. And we will continue to work with you to make sure they are productive, effective, and flexible. We need to get small businesses the capital they need, so that they can play a role in strengthening the recovery. The economy is moving in the right direction, with six straight quarters of growth and 13 straight months of private sector job creation. What you do at community banks – helping families get mortgages, helping small business grow – is essential to protecting and supporting this recovery. And we are committed to working with you – whether through financial reform or small business programs – to make sure that community banks are able to play their important role in a stronger financial system and a strengthened economy. https://www.treasury.gov/press-center/press-releases/Pages/tg1154.aspx 3/3
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