Treasury Secretary Timothy Geithner is planning to unveil the Obama administration's plan for regulatory reform Thursday, which will address issues including systemic risk. Speaking at the Council on Foreign Relations in New York Geithner added that the government needs to expand its power in order to prevent another financial meltdown.
Expanded government power is necessary to help ensure that this country is never again confronted with the untenable choice between meltdown and massive taxpayer bailouts, Geithner said.
Tomorrow, I will lay out the administration's broad framework for dealing with the kind of systemic risk that AIG posed, he added. The framework will significantly raise the prudential requirements, once we get through the crisis, that our largest and most interconnected financial firms must meet in order to ensure they do not pose risks to the system.
Specifically, the framework will extend power when it comes to dismantling failing financial institutions, allowing the Treasury to step in and wind down systemically important institutions faced with bankruptcy.
There is an existing procedure for systemically important commercial banks, whereby the FDIC steps in to operate a bridge bank, limiting financial disruptions. The Treasury's plan will likely call for a similar system for nonbank financial firms with systemic importance.
The existing bankruptcy law does not account for the systemic impact of the failure of a firm. Geithner's plan will likely include incorporating the impact of the failure into the resolution mechanism, in order to reduce financial disruptions and minimize the costs to taxpayers.
One of the key lessons of the current crisis is that destabilizing dangers can come from financial institutions besides banks, but our current regulatory system provides few ways to deal with these risks, he said.
The plan will require international cooperation, Geithner said, an issue that is likely to be addressed at the upcoming Group of 20 in London during the first week of April.
Our plan will not focus solely on financial regulations in the United States, but -- with the help of other interested nations and strengthened international bodies -- on stronger standards globally, as well, said Geithner.
Meanwhile, Geithner predicted that the US dollar would remain the world's dominant reserve currency. He added that he believes a strong dollar is very important. The dollar has enjoyed a surge in the midst of the global downturn.
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