Bretton Woods Committee’s Origin and Its Role:
Bretton Woods Committee was established in 1983 to address concerns about the international financial system, which was experiencing strain at the time. It was created to promote American support for the Bretton Woods institutions (IMF and World Bank) and international financial cooperation.

Historical Context:
The International Monetary Fund (IMF), created in 1944, faced challenges due to disorderly exchange rates, questioning its role as a guardian of fixed exchange rates. The World Bank, meanwhile, faced the Latin American debt crisis of the early 1980s, as massive flows of funds to less developed countries suddenly halted.

Exchange Rate Fluctuations and Lack of Stability:
Despite efforts to find greater stability in exchange rates, major exchange rates remained unfixed, leading to distortions in trade and political tensions. Both developed and developing countries now require infrastructure investment, and emerging countries have access to market borrowing.

Bretton Woods’ Enduring Role:
The Bretton Woods Committee continues to advocate for international cooperation through the IMF, World Bank, and other organizations. Bretton Woods represents an ideal of sovereign nations working together to support open markets and a stable, growing world economy.

Need for Big Changes Post-Financial Crisis:
The depth and breadth of the recent financial crisis demanded a coordinated national and international response. The international response, despite challenges, has been reasonably successful in addressing the crisis.

Post-Crisis Financial Reforms: Progress and Challenges:
Substantial progress has been made in strengthening bank capital and liquidity requirements, addressing orderly resolution of failing banks, and recognizing risks of derivatives. Efforts to coordinate oversight of the shadow banking system are underway.

Waning Commitment to Sustaining Reform:
Despite progress, there is a concern that the commitment to sustaining financial reform is waning. Relaxation of key reforms and retreat into idiosyncratic domestic approaches may lead to fragmented approaches in international markets and institutions. Diverging regulatory approaches could impair coordination in future crises.

Review of Dodd-Frank and Other Regulatory Approaches:
Dodd-Frank and other regulatory approaches have not gravely damaged the functioning of American financial markets, commercial banking system, or economic growth. A review of some provisions and practical effects of Dodd-Frank is appropriate, but claims of severe damage are not supported by evidence.

Considerations for Community Banks:
Community banks play a critical role in serving small businesses and are not systemically risky. Relief from regulatory burdens, stress testing, and examination frequency could be appropriate for true community banks. Defining true community banks and distinguishing them from institutions with aggressive risk-taking is a challenge.

Turning Back to Glass-Steagall:
Renewed discussion about restoring Glass-Steagall raises larger issues than simply tweaking Dodd-Frank or the Volcker Rule. Inconsistency with international practice would be a problem. Restoration of Glass-Steagall must not enable large investment banks to escape regulation appropriate for systemically important financial institutions.

Concerns About the Volcker Rule:
The Volcker Rule prohibits banking institutions protected by the federal safety net from taking proprietary positions and speculation. Agency interpretation of the Volcker Rule has been subject to lobbying and haggling. After five years, a final rule was agreed upon, and large banks have been adjusting to the requirements.

Overview:
Paul Volcker testified before Congress regarding the Dodd-Frank financial reforms. He discussed market functioning, the resolution framework for failing banks, and the need for regulatory reform.

Market Functioning:
Statistical evidence shows that bid-ask pricing, market stability, and liquidity have not changed significantly since the crisis. Data from the Federal Reserve supports the view that trading markets are serving customers well.

Resolution Framework for Failing Banks:
Dodd-Frank establishes a new approach for dealing with the failure of large complex financial institutions. The resolution framework includes an orderly liquidation authority (OLA) to prevent contagious runs and market freezing. Under OLA, the FDIC would oversee the liquidation of failed banks, selling viable operations and securing public funds with a prior claim on assets. The failing institution would fail without a taxpayer bailout, preventing the need for government rescues like those in 2008 and 2009.

International Cooperation:
The resolution framework has been developed in concert with other international regulatory authorities, emphasizing the need for a common methodology. Banking institutions involved are often international in scope, making international cooperation crucial.

Regulatory Reform:
Dodd-Frank has left largely untouched the regulatory and supervisory arrangements in the United States. The fractured regulatory framework has gaps and overlaps, leading to inconsistent and ineffective oversight. The disjointed regulatory structure contributed to the false sense of security before the crisis and prevented regulators from understanding the systemic risks.

The Financial Stability Oversight Council (FSOC):
The FSOC was established to promote coordination and address regulatory gaps in the financial system. It has made progress in data gathering and analysis, but its ability to overcome fundamental flaws in the regulatory architecture is limited. The FSOC cannot force coordinated action among competing agencies or serve as a focus for international cooperation on systemic issues. It lacks the capacity to effectively supervise complex and sophisticated financial markets.

Reform of the Regulatory Framework:
The fragmented structure of regulatory agencies has been a concern for many years, but there is strong resistance to change. Political and administrative challenges hinder reform efforts, despite numerous attempts over the years. Volker encourages the Congress and new administration to undertake a serious study of how to address the shortcomings of the current system. This effort should aim to simplify and modernize the regulatory framework, which has become an impediment to efficient and stable markets.

Global Cooperation in Financial Regulation:
Financial distress is no longer localized, and markets are inextricably interlinked. An international bailout of a failing American financial system is unlikely in a future crisis. It is essential for regulators globally to remain committed to a shared reform program. Short-sightedness in thinking that the U.S. can develop financial regulations insulated from other countries poses a danger. Progress has been made in areas such as capital requirements through international cooperation.

Missed Opportunity for Regulatory Reform:
The Obama administration and Congress focused on addressing the immediate weaknesses in the financial system after the crisis. While capital requirements were addressed, reforming the multi-agency regulatory structure was not a priority. The complexity of legislative efforts and institutional resistance contributed to the lack of comprehensive reform. Volker believes it is now an appropriate time to revisit the shortcomings of the current system and pursue simplification and reform.

Janet Yellen’s Testimony on Mortgage Excesses:
Yellen, as president of the Federal Reserve Bank of California, had identified the excesses in the mortgage market. She expressed her concerns to Washington but was limited in her ability to take action due to the fragmented regulatory structure. The example illustrates the difficulties in addressing systemic issues when regulatory responsibilities are divided among multiple agencies. The lack of a clear mandate and coordination led to a regulatory lapse, contributing to the financial crisis.

Consumer Financial Protection Bureau (CFPB):
Volker acknowledges that the CFPB has been successful in consolidating regulatory and supervisory responsibilities for consumer protection. He emphasizes the importance of giving the agency a clear and powerful mandate, as was done when it was created.

One-Man Agency vs. Multi-Person Board:
Volker raises the question of whether a one-man agency like the CFPB is the most appropriate structure. He suggests that a multi-person board with bipartisan representation and longer terms could help reduce politicization.

Independence and Financial Support:
Volker stresses the importance of ensuring the CFPB’s independence and providing it with adequate financial support.

Dodd-Frank and the Volcker Alliance Report:
Volker highlights the significance of preserving key elements of the Dodd-Frank Act, which was enacted in response to the financial crisis of 2008. He mentions a report by the Volcker Alliance that examines the impact of the Dodd-Frank Act and proposes reforms to strengthen financial regulation.

Derivatives and Systemic Risk:
Concerns raised about the contribution of derivatives markets to systemic risk due to their immense size compared to the related cash markets. Questions were asked whether this position-taking in derivatives markets is healthy and stable or if it exacerbates interconnections and contagion.

Fiduciary Rule:
The fiduciary rule was discussed briefly, and it was noted that it sounds reasonable and hard to object to. There were concerns expressed that some people may not be able to afford good financial advice under the fiduciary rule.

Mortgage Market and Fannie Mae/Freddie Mac:
The future of Fannie Mae and Freddie Mac was discussed, with the consensus being that they were “bastard institutions” that were neither fish nor fowl. The fixation on 30-year fixed-rate mortgages with no prepayment penalties in the United States was highlighted as a contributing factor to the crisis. The need to develop a safer securitization system protected by the private sector was emphasized.

Bankruptcy Reform for Financial Institutions:
A bill passed by the House Judiciary Committee called the Financial Institution Bankruptcy Act was mentioned. Concerns were raised that this bill, if it attacks the resolution authority, would be a mistake.

Volker’s Criticism of Bankruptcy as a Resolution Mechanism:
Paul Volker argues that ordinary bankruptcy proceedings may not be suitable for resolving systemic bank failures. He expresses confusion over the objections to the FDIC’s handling of bank failures, suggesting that bankruptcy courts may not be equipped to handle the complexities and urgency of these situations.

Volker’s Emphasis on Speed and Market Stability:
Volker highlights the need for rapid and efficient resolution of systemic bank failures to minimize market disruption. He stresses the importance of preventing the collapse of major financial institutions like Lehman Brothers or Citibank from causing widespread instability.

Volker’s Defense of the FDIC’s Role:
Volker asserts that the FDIC is capable of managing systemic bank failures effectively, citing its track record and expertise in handling such situations. He questions the rationale for introducing alternative resolution mechanisms, expressing skepticism about the benefits of such approaches.

Volker’s Call for Clarity and Understanding:
Volker acknowledges that the language used in the proposed legislation may be unclear and open to interpretation. He emphasizes the need for a clear understanding of the objectives and implications of any changes to the existing resolution framework.

Volker’s Openness to Discussion:
Volker expresses a willingness to engage in discussions and consider different perspectives on the issue. He encourages further dialogue and analysis to explore the merits and drawbacks of various resolution mechanisms.

Question on Too Big to Fail and Potential Solutions:
An attendee raises a question regarding the effectiveness of measures taken to address the “too big to fail” problem. The question explores whether higher capital levels or other measures, such as addressing liquidity concerns, could be effective solutions.

Volker’s Optimistic Outlook on Bank Failures:
Paul Volker expressed optimism about the banking system’s resilience, emphasizing that banks are not in a failing state and there is no need to worry about “too big to fail” situations. He attributed this stability to the increased capital and liquidity requirements and other supervisory measures implemented to prevent bank failures.

Resolution Process as a Safety Valve:
Volker acknowledged that despite the strengthened regulatory framework, a resolution process serves as a final safety valve to address any potential bank failures. This process is intended to be a last resort and is not anticipated to be necessary in the foreseeable future.

Trump’s Conservative Board and the Fed’s Future:
Nathaniel Welch inquired about the implications of a conservative majority board at the Fed under the Trump presidency. Volker expressed confidence in the Federal Reserve’s ability to thrive and remain strong regardless of political changes. He emphasized the importance of first-class appointments to the Fed and highlighted the institution’s exemption from political considerations in policy and regulation.

Recognition of Volker’s Contributions:
Bill Rhodes commended Volker’s speech as a tour de force, providing valuable guidance for the new administration and international regulation. He acknowledged Volker’s significant contributions to the stability of the U.S. and international financial systems.

Appreciation for Volker’s Leadership:
The Bretton Woods Committee and the audience expressed gratitude to Volker for sharing his insights, warnings, and stories. The event concluded with appreciation for the IMF’s support, the sponsor, staff, audience, and speakers for their contributions to the successful event.