By Richard Neiman
Stabilizing the housing market alone will not fix the financial crisis, but the financial crisis cannot be solved without addressing the many families across the country losing their homes. We are using every tool at our disposal at the state level here in New York. But there is only so much that any one state – even a progressive state like ours – can do on its own. Stabilizing the financial markets and the economy has to be a national effort as well.
As the nation’s hub for global finance, New York has a unique perspective to contribute in aiding consumers and reforming the U.S. financial system. That is why Governor Paterson urged the leadership in Congress to include state representation from New York on the Congressional Oversight Panel evaluating the Treasury Department’s management of the TARP.
I am privileged to have been appointed by Speaker Pelosi as one of the five members of that panel, which we also refer to as “the COP.” I have always said in responding to the financial crisis that we need more “cops” on the beat, not fewer. The Panel is a bipartisan effort that joins members with extensive experience and a range of ideological viewpoints. That diversity is our strength.
The Panel’s tasks include both regular monthly reports as well as a special report on regulatory reform that was released at the end of January. You can read these reports on the Panel’s website at www.cop.senate.gov. The first regular report was issued in December, and laid out a framework for future inquiry through a set of ten questions. These questions cover fundamental issues, including: is the strategy working to stabilize markets and reduce foreclosures? What have banks done with the money? And is the public receiving a fair deal? The regular monthly reports have focused on Treasury’s initial response to these questions, as well as a valuation of investments made through capital purchases.
Report on regulatory reform
Our most comprehensive work to date is the special report on regulatory reform. The Panel identified eight problems with recommendations for improvement:
Identifying and regulating systemic risk;
Limiting excess leverage;
Modernizing supervision of the shadow financial system;
Creating a new system for regulating consumer credit products;
Creating executive pay structures that discourage excessive risk-taking;
Reforming the credit rating system;
Establishing a global financial regulatory floor; and,
Planning in advance for the next crisis.
The issue of regulatory reform is an area where I believe I bring a unique perspective as the only regulator on the Panel. I voted to support the report, and also issued supplemental views for two reasons – to amplify issues that I believe are critical and, where the Panel presented options but did not reach consensus on any one approach, to offer my specific recommendations.
There are three main points I highlighted:
1. States must be allowed to increase their role in protecting consumers. States, like New York, sounded an early alarm on subprime lending by adopting anti-predatory lending legislation and reaching landmark settlements with the nation’s top mortgage bankers. These actions led to hundreds of millions of dollars in consumer restitution and improved industry practices. Rather than join with the states, however, the OCC and the OTS thwarted state efforts with broad claims of preemption. That is why I underscored the report’s call to roll back the overreach in federal preemption. I called for what I refer to as a progressive federalism that would draw on what is best in our current dual banking system, close gaps in consumer protection, and maximize the effectiveness of the joint resources of state and federal regulators.
2. The Federal Reserve should set minimum national standards on consumer protection. These should be strong mandates that cover affordability, suitability, and duties of care; disclosure alone is insufficient. In designating a regulator with over-arching consumer protection responsibilities, however, it is critical to keep the consumer protection and safety and soundness functions within the same agency. A loan that is unfair to consumers is not prudent. Regulators need to look at an institution holistically, to detect emerging trends and have the right tools to respond. Too narrow a mission could lead to impractical regulations with unintended consequences. Though the Federal Reserve has been slow to act in the past, the present crisis has served as a wake-up call.
3. The Federal Reserve should be the systemic regulator. The Panel’s report correctly identifies the need for a systemic risk regulator, and I agree with the G-30 and others who state that this is a job for the central bank. The Fed’s functions in setting monetary policy, overseeing bank holding companies, and as lender of last resort position it as the nerve center. We do need to give the Fed authority over a wider range of institutions, but creating a new agency would duplicate existing functions and dilute accumulated experience.
Upcoming report on foreclosures
And the work of the Panel in regulatory reform and other key topics is continuing. The March report will focus on foreclosures, in particular:
Data collection and the need for standardization;
Drivers of default and re-default, especially the interaction between affordability and negative equity; and,
Impediments to loan modifications.
The Panel’s purpose in this next report is not to endorse or propose any particular foreclosure program at this stage, but to identify factors that any successful program should address. While the report will provide Congress with facts to consider in policy decisions, I intend for it to be a practical resource for industry as well, to help in the design of loss mitigation strategies.
I hope that you will continue to provide me with your feedback on foreclosure prevention and the range of issues under consideration by the Panel. Your innovative ideas are an important part of the solution as we work together to stabilize the financial system.
Richard H. Neiman, superintendent of the New York State Banking Department, writes on regulatory issues for Banking New York.