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Good morning. I would like to thank IIB for hosting this event. It's a pleasure to be here.
We have just concluded a series of meetings with finance officials from around the world at the Annual Meetings of the World Bank and the IMF. The dominant focus was the need for greater cooperation and coordination to steer the global economy onto a path of stronger and more balanced growth. Officials from around the world emphasized the critical responsibility of each major economy to support the global adjustment process. When some countries engage in policies of competitive non appreciation that impede global adjustment, it exacerbates adjustment challenges for other countries--whether through intensified capital inflows or diminished trade opportunities--and lowers growth overall.
To ensure more sustainable and balanced growth will require not only national policy actions in each of our countries, but also stronger international agreement on the rules of the game and a framework to ensure coordination.
Stronger rules of the game and greater international coordination--these are also the key requirements of a sounder and more resilient financial system. As everyone gathered in this room acutely understands, the financial crisis took an immense toll on our businesses, families and workers. We are still healing from the crisis, and we are still working to strengthen the global recovery and repair the financial system.
As you know, the
But one of the fundamental lessons of the crisis is that national efforts, by themselves, while necessary, may not be sufficient: globally synchronized financial markets require globally convergent financial standards. International coordination is critical to ensure that efforts to promote safety and soundness in one major financial jurisdiction are reinforced and not undermined by other jurisdictions, globally active institutions are overseen by globally coordinated authorities, and the playing field is level. That is why we are pursuing a common agenda across the major financial jurisdictions through the G-20, the FSB, the IMF, and the international standard setting bodies.
But while our domestic reforms are comprehensive, our efforts to achieve international convergence are selective. Where financial activities and transactions migrate rapidly across borders in response to minute differentials, we are working to achieve international harmonization. Where longstanding differences in national institutions and business models call for tailored national solutions, we are working internationally to share best practices and principles. And where cooperative action across borders is needed, we are working to establish complementary national regulatory foundations coupled with international frameworks for cooperation.
Achieving Convergence on Capital, Derivatives, and Hedge Funds
Why do we need convergent international financial regulatory standards? I'd suggest that we can answer that question by simply looking around the room. Decades of technological innovation and globalization have created an interconnected financial system that requires convergence on core standards to ensure safety and soundness no less than fairness.
The two biggest issues in this camp are capital and OTC derivatives.
Capital is at the core of the system. Failures in our system of capital requirements contributed centrally to the severity of the crisis. Where we had capital requirements, they were too low and they were not supplemented with complementary liquidity requirements. A set of financial institutions were allowed to emerge in the shadows of the banking system with no capital requirements at all. And capital standards were not applied consistently around the world, with banks in some jurisdictions allowed to operate with low levels of capital relative to the risks they took on.
At last year's Pittsburgh Summit, President Obama and other G-20 Leaders, called for financial institutions to raise the quality and quantity of capital, strengthen liquidity standards and implement rules to limit leverage. Strengthening capital requirements and ensuring more stable funding for major financial institutions was an important objective of our domestic legislation. Together, the Dodd-Frank Act and the Basel III capital framework are designed to ensure that major financial institutions here and around the world are subject to rigorous and consistent capital requirements.
The new Basel III capital accord will significantly tighten the system of global capital requirements in a number of important ways. The new rules will increase the proportion of capital that must be in the form of common equity--the form that can best absorb losses--and will restrict forms, such as deferred tax assets, which proved to have little value during the crisis. Banks will be required to hold more capital against the kinds of risky products and activities that caused such damage two years ago. In addition, the new
The new Basel III requirements will be the bedrock of the new, more resilient global financial system, and
Similarly, the opaqueness of the OTC derivatives market contributed centrally to the uncertainty that sapped market confidence in the crisis. Lack of understanding about derivatives exposures made it difficult for firms to fully assess counter party risk. This added to the reluctance to extend credit and was a further drain on liquidity.
Recognizing the global reach of these markets, we have worked internationally to develop common standards for derivatives trading. G-20 Leaders committed to bring standardized OTC derivatives trades onto organized trading platforms, as appropriate. Leaders also committed to ensure that all standardized contracts would be executed through central counterparties, to help reduce bilateral exposures between firms. Finally, Leaders called for all OTC contracts to be reported to trade repositories, so that supervisors could better monitor systemic risks.
The Dodd-Frank Act implements these G-20 commitments, and goes further, providing strong oversight of major derivatives markets participants and market infrastructure. And the EU is working on a parallel track to introduce consistent reforms across European markets.
It is also vital to have common agreement on the regulation of hedge funds, and to extend the perimeter of regulation to ensure stronger oversight of these funds. We have pursued international agreement on the same approach adopted by the
It is essential to ensure convergence of regulatory treatment for hedge funds to avoid a race to the bottom and promote a level playing field. Indeed, all the members of the G-20 committed to the same standards for oversight of hedge funds and to implementing these standards in a nondiscriminatory manner, and we are working hard to ensure these commitments are fulfilled.
Common Principles and Differentiated Practices
At the other end of the spectrum lies a set of issues that may be informed by common international principles, but where our national efforts are most effectively tailored to national circumstances.
We have long recognized differences in the institutional structure of national financial systems, reflecting different laws and histories. The
Similarly, one of the central achievements of Dodd Frank will be to create strong and consistent regulation and supervision of consumer financial services to protect consumers from unfair, deceptive, and abusive practices. We look forward to consulting with
International Cooperation
Finally, let me address a core part of our reform agenda where the most effective approach is likely to combine elements of international convergence and cooperation while recognizing different national contexts.
Addressing Too Big to Fail is at the heart of our efforts domestically in The Dodd-Frank Act and internationally through the G-20, FSB, and Basel Committee. There is growing international consensus that an effective solution to reduce the moral hazard associated with large interconnected financial institutions must include at a minimum more intensive supervision, heightened loss absorbency capacity--reflected in Basel III--and effective resolution tools and frameworks.
The G-20 agreed that large and complex financial institutions require particularly careful oversight given their systemic importance. In the United States, the Dodd-Frank Act has addressed the issue of systemic firms by bringing all bank holding companies with assets over $50 billion, as well as non-bank financial firms deemed to be systemic by our new Financial Stability Oversight Council, under our new enhanced supervision regime. The EU, for its part, is institutionalizing a new European Systemic Risk Board, and some countries are instituting new national oversight mechanisms.
Instituting strong national resolution regimes is also central to this effort and a key building block for effective cross-border resolution frameworks. In March, the Basel Committee made an important contribution with its 10 key recommendations on the cross-border resolution of banks and non-banks, and G-20 Leaders in Toronto committed to implementing them. In the months ahead, it will be important to review implementation at the national level.
And there is an important FSB work agenda to ensure that national resolution frameworks mesh to provide a strong foundation for cross-border resolution, ring-fencing and burden-sharing are effectively addressed, and cooperative frameworks are developed among supervisors consistent with firm specific resolution and recovery plans. More analysis will be needed to determine the feasibility of contingent and bail-in capital instruments, which could contribute to loss absorbency and serve as complements to effective resolution frameworks, as Paul Tucker will address.
Let me conclude by noting that the leading economies have made significant strides in advancing international financial regulatory reform. With the enactment of The Dodd-Frank Act and agreement on Basel III, and with important parallel efforts underway in other major jurisdictions, the outlines of a more resilient financial system are now clearly in sight. We look forward to working with our partners on implementation of these efforts in the months and years ahead.
Thank you.
