Thank you for the introduction. I’m very glad that I’m able to join you for this tenth annual Treasury Market Conference. This conference helps the government identify ways to further improve the functioning and resilience of the Treasury market, which is of course core to the functioning and resilience of the U.S. financial system as a whole. And this makes it a fitting place for me to share my thoughts on the work I and my colleagues across the Biden-Harris Administration have done to navigate financial stresses and strengthen the U.S. financial system over the past three and a half years. In my remarks today, I’ll address why this work is so important, our approach to achieving a healthy and resilient financial system, and what we’ve accomplished.
I. The Importance of a Resilient Financial System
I’ve focused on financial stability as Treasury Secretary and throughout my career because of a deep conviction concerning the importance of the U.S. financial system to U.S. economic prosperity. I’ve seen through many businesses cycles and financial stresses that a strong, dynamic, and resilient financial system is key to a strong, dynamic, and resilient economy.
When the financial system works as it should, it helps American households finance home purchases and save for their children’s educations. It enables businesses to get the capital they need to grow and hire and to invest in new innovations. It allows households and businesses to manage their risks so that they’re prepared for the future.
Our strong financial system was crucial to our historic economic recovery, with banks continuing to lend and provide other critical services throughout the COVID-19 pandemic. Now, our financial system is crucial to our medium- and long-term economic agenda, supporting the record growth in new business applications we’ve seen under this Administration and the massive investments in infrastructure, clean energy, and manufacturing that are at the heart of the strategy I’ve called modern supply-side economics.
We should also never forget what happens when the financial system does not work as it should. During the Global Financial Crisis, the collapse of large and complex financial institutions and fragile short-term funding markets spread stresses through the financial system and then to the real economy. More than eight million Americans lost their jobs, the unemployment rate rose to 10 percent, and the net worth of American households fell by more than $10 trillion. The recession was the deepest since World War II, lasting six quarters.
All of this leaves no question about the need for a resilient financial system. But in January of 2021, I stepped into a Treasury Department whose focus on financial stability had all but disappeared. I knew that this could lead to devastating results for American families, businesses, and financial institutions. So, I worked to restore our government’s focus on financial stability and to craft an approach to build and maintain a financial system that households and businesses can count on day-to-day and that supports economic prosperity in the long-run.
II. Our Approach
Our approach includes a focus on shoring up strong core foundations of the financial system, including safe and sound financial institutions, financial market utilities and central clearing counterparties, protections for investors and consumers, and financial market integrity.
We also, however, recognize the necessity of considering the stability of the system as a whole. We see that connectivity between different financial institutions and markets—from direct linkages to correlated trades—can create outsized effects on the broader financial system and on our economy.
This understanding is rooted in recent history. In the aftermath of the Global Financial Crisis, the United States and other countries enacted important financial reforms and pursued new macroprudential policies focused on mitigating systemic risk. At home, there were some who strongly opposed the Dodd-Frank Act, arguing that its regulation would hold back innovation and economic growth. I and many others have insisted on the opposite: Appropriate regulation is critical to supporting a resilient financial system that serves as an engine for innovation and growth.
Our view has been borne out. Critics’ warnings, for example, that regulation would undermine the competitiveness of U.S. banks, did not come to pass. Reforms strengthened the financial system, including by equipping banks with substantially more and higher-quality capital that made them better positioned to extend credit to households and businesses that needed it during the pandemic.
But we’re well aware that financial intermediation continues to evolve, including in response to reforms. The pandemic also caused profound financial market disruptions like the global dash for cash in March of 2020, revealing additional vulnerabilities including in short-term funding markets.
Finally, our approach reflects the importance of collaboration and communication across regulators and other authorities. Responding to financial crises requires swift, coordinated action. Identifying vulnerabilities requires sharing insights. We recognized this need in the aftermath of the Global Financial Crisis as well and established the Financial Stability Oversight Council to inform a more holistic view of and approach to risks.
But the Council was severely weakened during the prior Administration. When I took office, the number of Council staff had been cut to single digits. The Council’s analysis team at Treasury, which monitors systemic risks, had been eliminated. The infrastructure supporting interagency engagement and coordination had been significantly scaled back. Put simply, we were without crucial tools to identify and help respond to risks to financial stability. This meant we faced an increased likelihood that risks would materialize into negative impacts on American households and businesses.
So, we rebuilt FSOC, scaling up staff and increasing opportunities for agencies to come together to share expertise and insights. FSOC’s new Analytic Framework for Financial Stability Risks is also critical, identifying key vulnerabilities, transmission channels, and authorities to mitigate risks. This positions the Council to take more effective action. And it increases public transparency.
III. Key Accomplishments
Let me now turn to how we’ve deployed this focus on core foundations, the system as a whole, and collaboration and communication to meet challenges in four key areas. I’ll address how we’ve improved the resilience of the Treasury market; implemented an effective and targeted response so that the regional banking stress in 2023 did not derail our recovery; addressed the diverse risks posed by the evolving nonbank sector; and tackled cross-cutting risks. I’ll also speak to our global work.
A. Treasury Market
Given where we are, I’ll start with the Treasury market. As this audience knows well, the Treasury market carries out a range of critical functions. Treasury securities are used to finance our government at the lowest cost to the taxpayer and by the Federal Reserve to implement monetary policy. A strong Treasury market helps underpin the role of the dollar in global transactions. Treasuries are a major fixed-income asset for investors around the world and serve as collateral for a wide variety of transactions. They’re also used as a reference benchmark for global asset prices.
So, since the start of this Administration, our focus on strong core foundations has led to wide-ranging work with other agencies and the private sector to strengthen the Treasury market so that it remains the deepest, most liquid market in the world. Even as there’s always more to do, we’ve made significant progress and documented it each year, publishing the latest report just last week.
We’ve supported transparency and enabled the government to better assess vulnerabilities by increasing the availability and quality of data on Treasury market activity. For example, just this year, we’ve made more information on Treasury market trading activity available to the public. And we’ll soon begin collecting transaction-level data in the non-centrally cleared bilateral repo market—likely the largest repo market segment in the U.S. and concerningly the one for which the least information has been available.
We’re helping bolster market liquidity through a new Treasury buyback program that provides regular opportunities for dealers to sell off-the-run Treasuries back to Treasury. Buybacks also strengthen Treasury’s cash management—including to reduce borrowing costs over time.
We’ve made progress in standardizing risk management through the SEC’s adoption of a new rule to expand central clearing in the Treasury market. And we’ve increased consistent regulatory oversight and enhanced investor protection with a rule clarifying when liquidity providers are required to register as dealers.
B. Banks
But as I laid out, our approach considers not just strong core foundations, but also the stability of the system as a whole and the need for strong communication and coordination. Our response to the regional banking stress in 2023 showcased how we’re making good on all of these aspects.
A year and a half ago now, Silicon Valley Bank and Signature Bank experienced runs that were particularly large and fast by historical standards. These banks had seen rapid deposit growth, especially in uninsured deposits, as well as significant unrealized losses on their securities portfolios. Their runs were followed by deposit outflows from other regional and mid-sized banks that were perceived to have similar weaknesses.
We knew we needed to mitigate what was a serious risk of contagion. So, we acted decisively. Regulators moved quickly to close the banks. After receiving recommendations from the Boards of the FDIC and the Fed and consulting with the President, I approved invoking the systemic risk exception during that first weekend. This enabled uninsured depositors at these banks to have access to their funds on Monday morning so that they could pay their employees and suppliers. And that same weekend, with my approval, the Fed established the Bank Term Funding Program to help limit broader contagion.
Our efforts were successful, building on the base of a banking system strengthened by the reforms following the Global Financial Crisis. We prevented contagion that could have destabilized the broader financial system and derailed our economic recovery. And we made sure that American taxpayers didn’t bear the costs.
We’re well aware, however, that we need to address the core weaknesses these banking stresses revealed, and we urge moving forward on key next steps. We need greater supervisory attention on banks with less stable deposits, and we need regulations that account for unrealized losses on securities. We also need changes so that banks are better prepared for liquidity stress, such as making sure that they have diverse sources of contingency funding and especially that they have the capacity to borrow at the discount window and periodically test this capacity. This includes considering establishing collateral pre-positioning requirements to facilitate borrowing from the discount window, improving the discount window’s operational capacity, and enhancing coordination between the discount window and the Federal Home Loan Banks. And we also need to support regulators’ efforts to strengthen long-term debt requirements for regional banks so that they can be more effectively resolved if they do fail.
C. Nonbanks
Our understanding of the need for a holistic approach has also driven work on nonbanks, which have become an increasingly important part of the U.S. financial system over the past few decades. Credit provided by U.S. nonbank intermediaries has been growing more quickly than bank credit and now exceeds on-balance sheet bank credit. This makes nonbanks an essential source of financing, with different segments of the sector supporting diverse activities, from trading to retail. And this also means we need to focus on their vulnerabilities.
Making sure FSOC has the tools it needs has been at the heart of our work. Last November, the Council took a key step forward by issuing updated guidance that establishes a transparent and durable process for how the Council uses its authority to designate a nonbank financial company for Fed supervision and prudential standards. This strengthens the Council’s ability to promote a resilient financial system.
But designation remains only one of FSOC’s statutory authorities, and the nonbank sector is heterogeneous and diverse, so we’ve also pursued much broader work.
We’ve made progress addressing investment funds with features that create financial vulnerabilities, such as through the SEC increasing liquidity requirements for money market mutual funds to reduce run risk. FSOC member agencies continue working to support better data collection and monitoring to identify risks from highly leveraged hedge funds and the growth in private credit. In other areas, like open-end funds, the SEC and industry should continue to explore potential options to address remaining vulnerabilities.
We’ve also focused on the increase in market share of nonbank mortgage servicers, which perform critical functions like collecting payments. FSOC, using its new Analytic Framework, issued a report finding that stress in this sector could harm mortgage borrowers and disrupt economic activity. Its recommendations include encouraging state regulators to strengthen prudential standards and require resolution and recovery planning and calling for congressional action to establish a fund to facilitate continuity of servicing operations in the event of stress while avoiding taxpayer-funded bailouts.
We’ve also identified new vulnerabilities related to newer entrants like fintechs and technological changes, including vulnerabilities presented by the significant growth of digital assets and trading platforms. Our work included issuing a report on digital assets and one on stablecoins, both of which assessed risks and called for Congress to legislate to close regulatory gaps while supporting innovation.
D. Cross-Cutting Risks
And across banks and nonbanks, we have also been focused on what I’ll refer to today as cross-cutting risks, including those related to cybersecurity, artificial intelligence, and climate.
To combat cyber risks, we’ve helped lead a multi-year effort in collaboration with the private sector to bolster the safe and effective use of cloud services. We worked with banks to launch a cybersecurity alliance called Project Fortress: a public-private partnership through which we’re joining forces with financial institutions of different sizes to deploy defensive measures like a tool that scans for vulnerabilities and offensive measures like sanctions to hold perpetrators of cyber-related activities accountable. AI could provide an advantage, at least initially, to cyber threat actors, so we’ve responded by providing a playbook for financial institutions on best practices for managing AI-specific cyber risks.
More broadly, we also see that AI technologies bring significant potential for efficiency and other benefits but also potential risks. We are working to monitor adoption, identify vulnerabilities, and assess whether existing regulations are sufficient to mitigate them or new ones are needed.
We’ve focused on climate-related risks to financial stability as well. The Council’s work to strengthen interagency coordination has been key, given gaps in data and fast-evolving risk-assessment methodologies. The Office of Financial Research launched a cutting-edge platform that provides regulators access to climate and financial data to support more research and analysis. And we’re currently collaborating with state insurance regulators to collect data on the cost and availability of homeowners insurance at the zip-code level to help us better understand the risks to the financial system from increasingly severe and frequent climate-related disasters.
E. Global Work
Addressing cyber, AI technologies, climate and many other risks also requires applying another aspect of our approach: coordination and collaboration, including across jurisdictions.
Risks don’t respect national borders. The largest financial firms operate in many countries, and cross-border investor flows are sizable. This means we need to coordinate and communicate regularly with our counterparts in other countries, and to engage through multilateral groups, like the G7, G20, and Financial Stability Board. We got a powerful reminder of the importance of strong international coordination, and especially the need for a well-functioning international framework for recovery and resolution, just last year with the failure of Credit Suisse.
So, we’ve made it a key priority to work closely with other jurisdictions before, during, and after times of financial stress. We’ve strengthened communication with counterparts in other jurisdictions, such as the EU, UK, and India, to understand each other’s policies, clarify our intentions and expectations, and respond to crises.
And financial stability has also been a key focus of our efforts to build a healthy economic relationship with China. The Financial Working Group that Treasury launched and co-chairs with the People’s Bank of China is now enabling regular and durable communication. And last month, we exchanged letters with the PBOC that strengthen information sharing and will make it easier to coordinate in times of financial stress.
IV. Conclusion
I’ll end here today, having I hope given some indication of the breadth and depth of our recent and ongoing efforts.
Work to build and maintain a resilient financial system is never over. We’ll never be able to just declare victory. And successes can be hard to fully appreciate because they often entail having avoided counterfactuals. But that does not make them any less significant.
We saw less than two decades ago how a financial crisis can turn the lives of millions of Americans upside down. And we saw only a year and a half ago that a government that keeps its eye on the ball can protect American businesses and households from financial contagion and its impacts.
I could not believe more strongly that we must keep at it. A resilient financial system is critical to a strong economy. And strengthening it requires insisting on thoughtful regulation, including in the face of challenges from those who advocate to roll back policies and regulations.
It has been an honor to contribute to this ever-changing, ever-important project throughout my career and over the past three and half years as Treasury Secretary. I am proud of where we are today, even as we remain committed to the work ahead.
