FINANCIAL-REGULATION/WOLIN

First, with respect to the application of the proposed scope
limits: all banking firms would be covered. This means any
FDIC-insured depository institution, as well as any firm that
controls an FDIC-insured depository institution. In addition,
the proposal would apply to the U.S. operations of foreign
banking organizations that have a U.S. branch or agency and are
therefore treated under current U.S. law as bank holding
companies. The prohibition also would generally apply to the
foreign operations of U.S.-based banking firms.
This proposal forces firms to choose between owning an insured
depository institution and engaging in proprietary trading,
hedge fund, or private equity activities. But -- and this is
very important to emphasize -- it does not allow any major firm
to escape strict government oversight. Under our regulatory
reform proposals, all major financial firms, whether or not
they own a depository institution, must be subject to robust
consolidated supervision and regulation -- including strong
capital and liquidity requirements -- by a fully accountable
and fully empowered federal regulator.
Second, with respect to the types of activity that will be
prohibited: this proposal will prohibit investments of a
banking firm's capital in trading operations that are unrelated
to client business. For instance, a firm will not be allowed
to establish or maintain a separate trading desk, capitalized
with the firm's own resources, and organized to speculate on
the price of oil and gas or equity securities. Nor will a firm
be allowed to evade this restriction by simply rolling such a
separate proprietary trading desk into the firm's general
market making operations.
The proposal would not disrupt the core functions and
activities of a banking firm: banking firms will be allowed to
lend, to make markets for customers in financial assets, to
provide financial advice to clients, and to conduct traditional
asset management businesses, other than ownership or
sponsorship of hedge funds and private equity funds. They
will be allowed to hedge risks in connection with client-driven
transactions. They will be allowed to establish and manage
portfolios of short-term, high-quality assets to meet their
liquidity risk management needs. Traditional merger and
acquisition advisory, strategic advisory, securities
underwriting, and brokerage businesses will not be affected.
In sum, the proposed limitations are not meant to disrupt a
banking firm's ability to serve its clients and customers
effectively. They are meant, instead, to prevent a banking
firm from putting its clients, customers and the taxpayers at
risk by conducting risky activities solely for its own
enrichment.
Let me now turn to the second of the President's recent
proposals: the limit on the relative size of the largest
financial firms.
Since 1994, the United States has had a 10% concentration limit
on bank deposits. The cap was designed to constrain future
concentration in banking. Under this concentration limit,
firms generally cannot engage in certain inter-state banking
acquisitions if the acquisition would put them over the deposit
cap.
This deposit cap has helped constrain the growth in
concentration among U.S. banking firms over the intervening
years, and it has served the country well. But its narrow
focus on deposit liabilities has limited its usefulness.
Today, the largest U.S. financial firms generally fund
themselves at significant scale with non-deposit liabilities.
Moreover, the constraint on deposits has provided the largest
U.S. financial firms with a perverse incentive to fund
themselves through more volatile forms of wholesale funding.
Given the increasing reliance on non-bank financial
intermediaries and non-deposit funding sources in the U.S.
financial system, it is important to supplement the deposit cap
with a broader restriction on the size of the largest firms in
the financial sector.
This new financial sector size limit should not require
existing firms to divest operations. But it should serve as a
constraint on future excessive consolidation among our major
financial firms.
The size limit should not impede the organic growth of
financial firms -- after all, we do not want to limit the
growth of successful businesses. But it should constrain the
capacity of our very largest financial firms to grow by
acquisition.
The new limit should supplement, not replace, the existing
deposit cap. And it should at a minimum cover all firms that
control one or more insured depository institutions, as well as
all other major financial firms that are so large and
interconnected that they will be brought into the system of
consolidated, comprehensive supervision contemplated by our
reforms.
An updated size limit for financial firms will have a
beneficial effect on the overall health of the financial
system. Limiting the relative size of any single financial
firm will reduce the adverse effects from the failure of any
single firm.
These proposals should strengthen our financial system's
resiliency. It is true today that the financial systems of
most other G7 countries are far more concentrated than ours.
It is also true today that major financial firms in many other
economies generally operate with fewer restrictions on their
activities than do U.S. banking firms. These are strengths of
our economy -- strengths that we intend to preserve.
Limits on the scale and scope of U.S. banking firms have not
materially impaired the capacity of U.S. firms to compete in
global financial markets against larger, foreign universal
banks, nor have these variations stopped the United States from
being the leading financial market in the world. The proposals
I have discussed today preserve the core business of banking
and serving clients, and preserve the ability of even our
largest firms to grow organically. Therefore we are confident
that we should not impact the competitiveness of our financial
firms and our financial system.
Before closing, I would like to again emphasize the importance
of putting these new proposals in the broader context of
financial reform. The proposals outlined above do not
represent an "alternative" approach to reform. Rather, they
are meant to supplement and complement the set of comprehensive
reforms put forward by the Administration last summer and
passed by the House of Representatives before the holidays.
Added to the core elements of effective financial reform
previously proposed, the activity restrictions and
concentration cap that are the focus of today's hearing will
play an important role in making the system safer and more
stable. But like each of the other core elements of financial
reform, the scale and scope proposals are not designed to stand
alone.
Members of this committee have the opportunity -- by passing a
comprehensive financial reform bill -- to help build a safer,
more stable financial system. It is an opportunity that may
not come again. We look forward to working with you to bring
financial reform across the finish line and to do all that we
can to ensure that the American people are never again forced
to suffer the consequences of a preventable financial
catastrophe.