Reflecting the upcoming holiday season, Gensler leaned on an "It's a Wonderful Life" metaphor to explain the changing modern banking system — just as Jimmy Stewart's George Bailey character had to use his own money to stave off a run on the Bailey Building and Loan Association in the film, so too did the American taxpayer have to pony up to head off a run on the global financial system during the financial crisis of 2008, he said. And now lawmakers have told regulators to change their methods to prevent a similar event in the future.
"Congress has determined that it is incumbent upon regulators to update to the reality that we no longer live in George Bailey's time," he added.
In 1946, when the film was made, 98 percent of bank liabilities were made up of deposits. Now, deposits account for just 63 percent, according to Gensler. And total banking liabilities in 1946 added up to $152 billion, a number that has since grown to $14.7 trillion today.
Since George Bailey's time, the global financial system has also seen the emergence of the over-the-counter derivatives market, populated by financial tools like interest rate swaps and credit default swaps. According to the Office of the Comptroller of the Currency, the largest 25 bank-holding companies have over-the-counter derivatives holdings of a total notional value of $277 trillion, which exceeds those banks' combined assets 20 times over.
The fact that federal regulators failed to update their practices to include the burgeoning derivatives market contributed to the failure of the financial and financial regulatory system, he said. Leading up to the crisis, over-the-counter derivatives were unregulated in the U.S., Europe and Asia.
Stemming from the Dodd-Frank financial overhaul, the CFTC is now charged with writing rules that regulate swaps. The agency is currently working on those regulations.
"To lower risk and increase transparency in the derivatives markets, swap dealers will be regulated and standardized swaps will be moved onto transparent trading platforms and into clearinghouses," he said.