Geithner Backs Bill For Tighter Regulation On Big Banks

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Treasury Secretary Timothy Geithner told lawmakers Thursday that important progress has been made toward comprehensive regulatory reform.

Geithner said that work must now be done to ensure that the financial system will be able to allow large financial firms to fail without damaging the economy in future financial crises.

"No financial system can operate efficiently if financial institutions and investors assume that the government will protect them from the consequences of failure," he said in prepared remarks before the House Financial Services Committee.

Geithner said that recent legislation proposed by committee chairman Barney Frank (D-MA) lays a foundation to "better protect consumers from unfair and fraudulent lending practices, regulate the derivatives market, improve investor protection, reform credit rating agencies, and extend basic oversight to hedge funds and other unregulated financial entities."

The secretary's remarks come a day after Frank introduced a proposal aiming to prevent future taxpayer bailouts of "to-big-to-fail" financial institutions.

Geithner said that the government must be able to resolve failed financial institutions without allowing the taxpayer to absorb the losses, instead shifting them to equity holders, creditors, and, possibly, other institutions.

"The government should have the authority to recoup any such losses by assessing a fee on large financial firms," he said.

As he has in many other speeches, Geithner stressed that the government must have stronger supervisory and regulatory authority over large financial firms.

"Regulators must be empowered with explicit authority to force major financial firms to reduce their size or restrict the scope of their activities when necessary to limit risk to the system."

He did stress, however, that the Federal Reserve and FDIC's emergency authorities must be subject to a system of checks and balances.

"These authorities should only allow for temporary support, with an appropriate fee, that is designed to enable healthy institutions to continue operating and to prevent the disruption of credit flows during a severe economic downturn," he said.

Geithner added that regulators must be able to impose tougher capital rules and "more stringent" liquidity standards in order to reduce the probability that large financial firms will experience distress.

The secretary concluded his remarks by stressing the importance of reforming the regulatory system, calling the current regulatory rules "inadequate and outdated."

"We have all experienced what happens when, during a crisis, the government is left with limited tools and limited choices," he said. "That is the searing lesson of last fall."

Treasury Secretary Timothy Geithner told lawmakers Thursday that important progress has been made toward comprehensive regulatory reform. Geithner said that work must now be done to ensure that the financial system will be able to allow large financial firms to fail without damaging the economy in future financial crises. (Market News Provided by RTTNews)