As prepared for delivery
Good evening, it’s an honor to be with you tonight.
Let me first express my appreciation to Vice Chair Bowman for arranging tomorrow’s conference. The Vice Chair has certainly hit the ground running, and we are all impressed by her early results.
I share with her a strong view on the urgency of reform. And I especially agree with the high priority she has given as a governor on the Federal Reserve Board to issues affecting our community banks.
In past remarks, I have made clear that we need a fundamental reset of financial regulation. And the Treasury Department is committed to playing an active role in this effort. That’s why earlier this year, I laid out guiding principles to build a financial system that delivers for both Wall Street and Main Street.
In the months since, we have begun delivering on that promise.
The bank regulators have proposed a recalibration of leverage capital requirements, ended the use of politicized reputation risk, proposed to rescind a byzantine 60,000-word Community Reinvestment Act (CRA) rule, launched work to focus supervision on material financial risks, started an interagency process on BSA/CFT reforms, and begun the effort to modernize our regulatory capital framework.
These first steps are chipping away at years of regulatory accretion. But isolated measures are not enough. We need deeper reforms rooted in a long-term blueprint for innovation, financial stability, and resilient growth.
Despite bank regulators’ significant influence on our economy, up until now, financial regulation has not been nested in a broader strategic vision for the financial system.
Instead, we have seen regulation by reflex. Rather than preempting crises, regulators all too often react to them after the fact. They play the role of a hazmat cleanup team instead of preventing dangerous spillovers in the first place. This is especially true in the case of supervisory failures, where regulators often overcompensate by piling rule on top of rule, based on an incomplete understanding of the larger costs and benefits to society. This reactionary approach can generate regulations at odds with our domestic and international priorities.
Some argue that in the past, regulatory weakening occurred when regulators failed to keep pace. And yet, the financial regulators have not, up to now, kept pace with digital assets or comprehended how their regulation by reflex was undermining the community bank model. Post-mortems to recent crises have been more self-serving exercises designed to support longstanding political agendas rather than honest, searching assessments about how to improve the system.
Rather than reflexively regulate anything that hits the headlines, we need to instead be more explicit about our vision for the financial system.
Defining that vision requires value judgments. And so, it cannot be a purely technocratic exercise. Instead, defining a path forward requires leadership with a broad perspective and coordination across the whole of government. The Treasury Department is perfectly positioned to provide that leadership.
Since Secretary Hamilton’s Assumption Plan, Treasury has worked to articulate a coherent vision for our financial system. Since Secretary Chase, Treasury’s Office of the Comptroller of the Currency has been responsible for our national banking system. And since our country’s founding, Treasury has led emergency responses to every major financial crisis.
Treasury also has a broad remit to shape a vision for our financial system. Our domestic mandate includes fostering economic growth and stability. We represent America’s economic interests abroad. And we strengthen national security by protecting the integrity of the financial system.
Consistent with that longstanding practice, I intend for Treasury to drive financial regulatory policy that puts American workers first, prioritizes growth, safeguards financial stability, and protects our national security.
To be clear, the bank regulators must continue to carry out their statutory mandates—maintaining safety and soundness, protecting consumers, and mitigating risks to financial stability. Rationalizing and tailoring regulation does not have to amount to regulatory weakening.
But in parallel, Treasury will convene interagency consultations to define a strategic policy direction.
To that end, Treasury will encourage bank regulators to consider how proposed rules will impact growth.
We will center financial regulation on Main Street, not Wall Street.
We will protect the viability of our community banks.
We will be vigilant against debanking of customers based on religious or political views on either side of the aisle.
We will reject international standard setting that does not advance America’s interests.
We will support innovation both within and outside the financial system.
We will drive alignment between our illicit finance program and our national security priorities.
And we will ensure the big questions of the day are answered consistent with America’s long-term interests. This includes the regulation of digital assets, the future of housing finance, and financial sector support for the onshoring of US manufacturing.
In all these efforts, Treasury’s most important contribution might simply be to reinforce the urgency of reform. To that end, the department will break through policy inertia, settle turf battles, drive consensus, and motivate action to ensure no single regulator holds up reform.
Which brings me to the topic of tomorrow’s conference.
We need to take a closer look at regulatory capital requirements.
Outdated capital requirements on some exposures are misaligned with actual risk, imposing unnecessary burdens on financial institutions. Excessive capitalization, for example, reduces bank lending. This stymies growth and distorts market structure in ways that increase risk. How? By driving lending out of the regulated banking system to nonbank intermediaries.
I look forward to seeing a proposal that addresses this and other known deficiencies in our antiquated capital framework.
At the same time, I hope that the proposal will simplify and rationalize the framework. On that note, there is an incredibly consequential—albeit quite technical—structural issue that regulators should address early on.
Under the July 2023 proposal, a bank would have been subject to two sets of capital requirements—first, a modernized set, and second, a legacy set based largely on today’s current “standardized approach”—with the greater of the two being the binding requirement.
This dual-requirement structure did not derive from a principled calibration methodology. It was motivated simply to reverse-engineer higher and higher capital aggregates. It also was at odds with capital reform as a modernization project because it would have preserved the antiquated capital requirements as the binding floor for many, perhaps most, large banks.
Bank regulators should consider abandoning this flawed dual-requirement structure.
Modernizing regulatory capital likely would mean reduced capital requirements for mortgage loans and some other exposures that are core to the community bank model. We cannot give only large banks the benefit of these reduced requirements, as actually contemplated by the last administration. One possible solution would be to give each bank that is not subject to the modernized requirements the choice to opt in. This would result in a meaningful reduction in capital for those banks.
I will close by reiterating my support for the Fed’s open-mindedness on the need for regulatory modernization. I am grateful for economic policymakers at the Fed who understand the urgency of reorienting financial regulation and the critical need to preserve a central role for community banks.
It is promising to see so much interest in this important topic, and I look forward to continuing to work with you all on regulatory capital reform.
###
