Mary Miller, the undersecretary for domestic finance at the U.S. Treasury, said during the Chicago Federal Reserve Bank’s recent annual International Banking Conference that while regulators have made progress in strengthening the economy, some areas require further attention.
Miller noted four areas “that strike [her] as particularly important,” including the completion of Dodd-Frank mortgage-finance rules, reform of the short-term funding markets, efficient derivatives regulations and the finalization of Basel capital standards.
Miller said that the finalization of Dodd-Frank mortgage finance rules is “critical” to reinvigorate the private lending market, adding that the Treasury expects the Consumer Financial Protection Bureau to finalize the” qualified mortgage” rule in coming weeks.
“Once the QM rule is completed, it will be important to finalize the asset-backed securities risk retention rule, another rule in Dodd-Frank that affects mortgages and includes the qualified residential mortgage definition,” Miller said. “Once finalized, these rules should help enhance lender clarity at the point of mortgage origination. The rules should also improve investor confidence in the underlying credit characteristics of the loans investors might purchase in the secondary market. This, in turn, can help re-start a more robust private securitization market for mortgages.”
Miller also spoke on the “structural vulnerabilities” of short-term funding markets and the need for reform in order to reduce risk to the financial system.
“The crisis demonstrated that money market funds are susceptible to runs and can be a source of financial instability with serious implications for broader financial markets and the economy,” Miller said. “We need to adopt reforms that strengthen money market funds’ loss absorption capacity and reduce the risk of destabilizing investor runs…We must also continue to improve the safety and soundness of our repurchase markets, which underpin another crucial source of short-term funding…Having deep and liquid repo markets are important for financial markets to operate efficiently, but they can also introduce risks to financial stability if they are not appropriately managed and monitored.”
Miller said the completion of derivatives regulations is also important, adding that “reforms should be guided by the key pillars of derivatives market reform.”
“The derivatives market is global and highly mobile, and as a result one regulator or one jurisdiction cannot effectively enact reforms alone,” Miller said. “To provide certainty to global market participants, many of whom are hedging risks that are integral to their core operations, the U.S. market regulators should strive to establish consistent standards that apply to cross-border transactions of similar types. We also support our regulators’ work with their international counterparts to develop robust frameworks for effective substituted compliance wherever appropriate…”
Additionally, Miller said that the finalization of Basel capital rules would “give banking institutions the clarity and confidence to expand their lending activities.”
“These regulations were expected to be phased in starting January 2013 through January 2019,” Miller said. “However, earlier this month, the banking agencies formally announced they do not expect the proposed rules to become effective on January 1, 2013. In the meantime…we encourage our international counterparts to implement the Basel III leverage ratio to ensure that there is a simple backstop against excessive risk and to promote a level playing field.”
Miller said that the priorities are important as they are not “just goals unto themselves.”
“Clarity engenders confidence in our financial system, and it is a crucial ingredient for job creation and economic growth,” Miller said. “That is why it is so important that we press forward with financial reform.”