Treasury chief confident 'too big to fail' will end

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Treasury Secretary Jack Lew on Thursday said he is confident the Wall Street reform law has made it so that financial institutions could no longer be “too big to fail.”

Earlier this year, Lew contended, if regulators were unable to ensure that big banks no longer enjoyed an implicit government lifeline, then more steps would be necessary. But now that regulators are putting the finishing touches on core pieces of the Wall Street overhaul, Lew said they had done the job.

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“Based on the totality of reforms we are putting in place, I believe we will meet that test — but to be clear, there is no precise point at which you can prove with certainty that we have done enough,” he said at the Pew Charitable Trusts. “If, in the future, we need to take further action, we will not hesitate.”

Lawmakers in both parties have been skeptical that the “too big to fail” era has come to an end and point to the fact that the nation’s biggest banks have only gotten larger since the financial crisis occurred.

Some lawmakers are pushing new legislation that would place further restrictions on large banks, but the White House has so far resisted such efforts.

Lew also swung hard at Republicans who continue to block budget boosts to several important financial regulators. GOP lawmakers argue the watchdogs have ample funds to do their jobs and point to previous missteps to argue against more dollars.

But Lew contended that those paltry budgets are just another attempt to block new regulations after Republicans failed to stop Dodd-Frank’s passage.

“Failing to fund supervision and enforcement of the new rules amounts to virtual deregulation,” he said. “Even in tight budgetary times, this is not a budget-driven choice.”

Lew’s lengthy remarks on the state of financial reform comes at a crucial state in the multi-year process to put Dodd-Frank in place. In a few days, financial regulators are expected to sign off on a final version of the “Volcker Rule,” a flagpole of that law aimed at curbing risky trading by banks that has been hotly contested by industry.

Lew expects regulators will put forward “tough” regulations implementing that provision, which will crack down on risky proprietary trades while giving banks the flexibility to keep markets liquid. He also said the new rule is aimed at risky trades similar to the ones that led to the multibillion dollar losses suffered by JPMorgan during the “London Whale” debacle.

In his remarks, Lew ran down the extensive list of new rules and regulatory powers in place thanks to Dodd-Frank, from new rules on derivatives to the creation of the Consumer Financial Protection Bureau.

He also emphasized the need for the U.S.’s international counterparts to adopt similarly strict rules for their financial sectors, to ensure that the global system is prepared to handle another collapse.

“As we know too well, financial crises do not respect national borders,” he said.

He cautioned that a failure by international partners to adopt similar rules would pose a “significant future risk,” and that he hoped the U.S.’s approach would be enough to compel other nations to follow suit.

“Our aim is clear, we want a global race to the top,” he said.

He also identified several other areas that regulators still need to address beyond Dodd-Frank. For example, he backed stalled efforts by the Securities and Exchange Commission to impose stricter oversight over the money market fund industry, and called for a closer look at nonbank financial companies and so-called “shadow banks” that are not covered by traditional oversight.

Furthermore, Lew pushed Congress to adopt a comprehensive housing finance reform proposal, which would further clarify markets and establish a future course for that big piece of business.