10 Truths About the Financial System

Wednesday, March 25, 2015 - 11:00am

"10 Truths About the Financial System"

Ninth Annual Capital Markets Summit

Remarks by 
President and CEO, U.S. Chamber of Commerce
Washington, D.C.

March 25, 2015



Thank you very much, and good morning ladies and gentlemen.

Let me thank David, Amanda, and the CCMC team for putting together another outstanding summit. I’d also like to recognize J.J. Johnson for his leadership as chairman of the CCMC board.

Five years after the passage of Dodd-Frank, there is still a vigorous debate in this country about the basics of our financial markets and the regulatory framework that governs them. It’s a debate that incites passion and division, and as result, it has often been more of a shouting match and less of a discussion.

Too often it has become an exercise in grabbing headlines, instead of a thoughtful dialogue on how to improve our system. The facts are often misconstrued, misrepresented, lost in the noise, or simply ignored. Everyone knows facts don’t matter in Washington if they challenge people’s preconceived notions or interfere with their political or personal agenda. And sometimes we’re not even arguing about the things that really matter.

The point of the debate, and the reason we hold this summit year after year, is that we need a financial regulatory system that works—one that serves consumers, empowers entrepreneurs, fuels business growth, enables saving and investment, spurs the economy, strengthens the financial system, and ensures America’s global competitiveness.

That’s what this is all about.

The Chamber’s Center for Capital Markets Competitiveness seeks to foster a thoughtful, truthful, productive debate. In fact, we started the debate eight years ago—before the crisis hit—because we knew that our system was in dire need of constructive reform then. And we clearly understood the fundamental link between effective financial markets regulation and the American economy. Ever since, we’ve been putting ideas on the table and working to make the system better.

What I want to do today is lay out some basic truths about the state of our financial regulatory system and what will happen if we ignore the real-world consequences of not getting regulation right. And if folks want to argue about these points, at least we’ll be arguing about issues that we believe really matter.

So here are 10 truths about the financial system as we see it.


Ten Truths

Truth No. 1: A well-regulated financial system lifts everyone up.

Well-functioning, transparent, efficient, and fair capital markets provide a ladder for advancement—and everyone should be able to use that ladder. Instead of fostering a false debate about the space between the so-called winners and losers, it should be about how we move more folks up the ladder.

Financial tools and consumer credit are essential to making our daily lives better. You can finance a car or a home, save for education and retirement, and even start your own business.

Access to vibrant capital markets is key to all of these opportunities. Without it, many would fail to pursue their dreams or live in comfort and security. When Americans have the opportunity to get ahead, our economy rises with them and so does our country—and we all do a little better.


Truth No. 2: Consumers must be protected—but they must also be served.

The Chamber believes that consumers should be empowered to make smart decisions about their finances and their future. They should have access to capital and credit providers, financial advisers, and all kinds of products to meet their needs. 

When regulators are so convinced that consumers are going to be taken advantage of, that they don’t have the ability to make informed choices, or that the government knows best, serving consumers falls by the wayside. It becomes a secondary priority, rather than the point. And serving consumers is the point.

A quick example: Regulators are legitimately concerned about short-term lending products. But the reality is that many Americans live paycheck to paycheck, watching their expenses carefully and hoping they won’t have any surprises. Regulators need to encourage lenders to transparently and responsibly meet the needs of those consumers. 

For many, borrowing for a couple of days before their next paycheck hits—a so-called deposit advance—can be an affordable way to make ends meet. But rather than trying to improve products like this, the Office of the Comptroller of the Currency and the FDIC took steps that essentially shut this option down, sending those consumers looking elsewhere—and I can assure you at a much higher price.

That is exactly the wrong approach.

We cannot limit consumers’ choices or access in the name of their own protection. That’s throwing out the baby with the bathwater. Instead, let’s focus on how to better educate, inform, and serve America’s consumers.


Truth No. 3: Capital markets are key to commerce.

A robust financial system fuels entrepreneurship, powering the ideas and innovations that improve our lives. It supports business operations and, with it, job creation and economic growth.

Main Street must have access to short- and long-term capital, liquidity, and risk management tools to keep their businesses running.

For example, companies often rely on products like commercial paper and Money Market Funds. They’re not taking out risky loans—they’re managing cash flow to pay bills, purchase inventory, or meet payroll. The reality of doing business—especially when profit margins are thin—is that cash going out isn’t always perfectly timed with cash coming in. And more businesses fail as a result of running out of money than running out of customers.

Other businesses have to make relatively costly investments based on volatile factors, like when a farmer buys new equipment for next year’s harvest without knowing what crop prices will be. How do they hedge their bets? Derivatives. And there’s a big difference between using derivatives for speculative purposes and for risk management purposes.

Congress, at the urging of the Chamber and its allies, finally recognized the difference and recently exempted end users like farmers and manufacturers from margin requirements. But we had to fight like hell for it.


Truth No. 4: Diversity in the system is a strength—not a weakness.

It gives consumers and businesses a wide array of choices for a variety of needs.

That’s why we need banks of all sizes. We need national banks, online banks, regional banks, community banks, credit unions, and trusts.

And, yes, we need the big global banks that our opponents are so eager to break up. They may not like it, but those banks provide services that no one else can.

For example, when the next hot company decides it’s time to go public, who is it going to use to handle the IPO? It’s going to take a bank with a global footprint, with the ability to navigate the regulatory process, with experience underwriting a major public offering, with the knowledge of what type of security to issue, what price to set, and when to launch it. Often, the deal takes more than one bank.

We need all of them.

We also need the institutions that fall outside of the traditional banking sector. Did you know that our financial services industry is 20% banks and 80% non-banks? All those other institutions are pretty damn important.

That’s one of the reasons the Financial Stability Oversight Council’s efforts to designate non-banks as systemically important and regulate them like traditional banks is so troubling.

Regulation, sometimes unintentionally and sometimes intentionally, makes things the same. If you tell an insurance company it’s going to have to comply by rules designed for a bank, it’s probably going to start thinking and acting like a bank. And before you know it, you’re taking things off the table, limiting choices, concentrating risk, and undermining economic growth.


Truth No. 5: Regulatory uncertainty stifles innovation.

Regulations can threaten the diversity of the financial products available by crowding out innovation. That makes it harder for the system to provide the tools businesses and consumers need.

Facing complex and burdensome rules or mounting regulatory uncertainty, firms will give greater consideration to what’s going to fly with the regulators than what the markets need to do to serve consumers. New products open up financial institutions to the threat of enforcement, so they’re being scared away from trying new things. You can end up with five regulators living within your institution, with each one telling you to do something different. How does that help?

What financial services providers need are both predictable rules of the road and a way to get clear answers from their regulators, not conflicting ones. But the Consumer Financial Protection Bureau seems to be operating with the opposite intent—creating maximum uncertainty and providing no clear answers.

To alleviate this, the Chamber has been pushing the CFPB to establish an advisory opinion process. So if a firm gets a bright idea, it can consult with the regulators and receive guidance on how to proceed in compliance with the law or regulation.

The Bureau should welcome this kind of engagement with the companies it regulates.  Indeed, CFPB Director Richard Cordray has indicated he agrees.

However, when the Bureau finally proposed a way to do this last year, it was focused so narrowly and cluttered with so many hurdles that even the Bureau says it only expects one to three companies to use it each year! That is almost worse than no system at all. And it will only create more innovation-stifling uncertainty. I believe that once he looks at this more closely, Mr. Cordray will make some positive changes.


Truth No. 6: By regulating only for stability, we will sacrifice growth.

Some believe that to ensure the stability of our financial system, we must eliminate all risk from the system. Well guess what? No risk, no growth! That’s the motivation behind designating non-banks as systemically significant and imposing stringent capital and liquidity requirements. 

Here’s the problem. Not only is eliminating risk an impossible proposition, it’s also a foolhardy one because it sacrifices the growth our economy needs.

How? When you tell an institution that it must have capital buffers against the credit it issues, it might be forced to cut commercial lines of credit altogether because they are a liability on the balance sheet.

When you tell an institution that it must have enough cash on hand at any given time to pay out all of its obligations within 30 days, it may stop accepting business deposits. Now wait a minute—wouldn’t deposits be welcome? Wouldn’t they be infusions of cash? Not in the minds of regulators. Business deposits can be withdrawn, so under the rules they actually count against an institution’s liquidity coverage ratio.

Now, higher capital and liquidity requirements can be a good thing. But they have to be calibrated correctly. If they’re not, financial institutions will either have to accept the risks and costs that the rules create or they’ll simply limit how they serve businesses and consumers.

And the ultimate cost will be business growth, job creation, and the entrepreneurial risk taking that drives our economy. And if you look at the number of new businesses and startups being created today, you’ll see the numbers are falling. Why? That’s a damn good question!


Truth No. 7: Our economy is global—the U.S. financial system must be global too.

The global financial system is highly interconnected. U.S. firms use global markets to raise capital and help serve businesses and consumers.

Global regulators are certainly meeting together more often and talking a good game about harmonizing the rules. But when the talk fails to translate into effective coordination between economies, it can hurt our competitiveness, foster fragmentation in the markets, and hold back the global growth we need.

The United States has the largest and most diverse capital markets in the world. We should lead by facilitating cooperation among partners—after we have ensured the stability and growth of our own markets. We must make sure that global regulatory efforts do not produce conflicting and unworkable rules. And we should create mechanisms to ensure effective international coordination and prevent financial protectionism.


Truth No. 8: Efforts to reform the system have made it more complex and less coordinated.

As most here probably agree, structural reform efforts, so far, aren’t helping.

Rather than modernize our New Deal-era financial regulatory system, Dodd-Frank has layered on a new framework. It has added another 400 rules and set 21 different agencies to the task of implementing them—including 3 new regulatory bodies. This is akin to watching children stack up blocks as high as they can until the whole thing comes tumbling down. That’s the road we’re on today.

What this has achieved is additional complexity, duplication, overlap, and contradiction. It means that we hire more people to deal with compliance than we do serving customers. We still have too many regulators that are competing for jurisdiction. And, by the way, no one is keeping track of the cumulative effect of all these rules.

We must bring greater clarity, efficiency, and certainty to our capital markets and ensure that they are properly regulated.

And that brings me to the next truth.


Truth No. 9: Business is not against regulation, it just wants smart regulation.

It’s easy to accuse business or market participants of trying to eliminate rules because they don’t want to be regulated. The Chamber has always said that it wants a well-regulated system—not an unregulated one.

The truth is that we want rules that work.

We want rules that are thoughtfully and transparently designed, based on sound data and demonstrated need, and maximize benefits and minimize costs. We want rules to be spelled out and clearly communicated. That way we know what’s expected of us and aren’t left to guess. We want to make sure someone is keeping track and adding it all up. And we want rules that are fairly and consistently enforced.

Clear, predictable rules that are enforced justly will strengthen the system for all of us.

Let me close with a final truth.


Truth No. 10: It’s not too late to fix the system.

In the debate, too many have made Dodd-Frank a line in the sand. You’re either for it or against it.

Some proponents of the law think it’s the answer to our problems—others think it hasn’t gone far enough and that we need to double-down on its regulatory approach, even though it’s proven ineffective. Opponents of the law want to see it repealed or dismantled.

The Chamber, believing that we can make incremental changes to strengthen the overall system, has been pushing the FAR Agenda. We’re proposing reforms to fix the provisions that the law got wrong, add the provisions that the law left out, and replace the provisions that just don’t work. We’re working to improve what we can.

But Dodd-Frank is not the beginning and the end of the debate over our financial system. Once we realize that this is not just about one law, we can focus on the way forward.

We can pursue the holistic changes to our financial regulatory system that will enable our capital markets to fulfill their purpose: to serve consumers, fuel entrepreneurship, drive business growth and spur job creation, strengthen our economy, and bolster our competitiveness.

The truth is that our capital markets can do all of those things and more if we let them. And that’s what this debate should be about.

It’s going to take an honest conversation and a thoughtful dialogue. It’s going to take a hard look at the facts in a town where facts are not well regarded. It’s going to take all of the stakeholders working together toward the common purpose of a financial system that meets everyone’s needs. We can have that debate—we must have it. And the Chamber and its partners will help lead it.

Failure to do so will find us back here next year—and the year after that—in much deeper water and with an economy that will already be paying the price for these regulatory missteps.

Thank you very much.