U.S. Treasury Secretary Timothy Geithner told Congress on Wednesday that it must act on financial reform legislation, saying changes are needed to ensure that Americans do not end up footing the bill for a possible future bailout of financial institutions.
In testimony to the House of Representatives Financial Services Committee, Geithner said legislation it is preparing with the support of President Barack Obama is crucial to ensuring a more stable financial system.
Saying that the current system of rules and enforcement failed to protect consumers and investors from the current recession, Geithner renewed his call for a fundamental overhaul. He warned Congress that it cannot allow momentum for reform fade as the memory of the financial crisis recedes.
"I'll just say it simply," said Timothy Geithner. "We need to have strong minimum national standards for protection. They need to apply not just to banks, but [also] to institutions that compete with banks in the business of providing credit. They need to be enforced effectively, consistently and fairly. And there need to be consequences for firms that engage in unfair and defective practices, consequences that are strong enough to deter that behavior."
During last year's economic crisis, the U.S. government provided hundreds of billions of dollars to troubled financial institutions and banks under the Troubled Asset Relief Program.
Proposed legislation would create a Consumer Financial Protection Agency to regulate products such as credit cards and mortgages, and prevent abuse.
But Democrats and Republicans have raised concerns about the proposal, with critics - including the U.S. Chamber of Commerce - asserting that it would create new bureaucracy, stifle financial innovation and increase costs in the long run.
To quiet some of the criticism, Representative Barney Frank, the Democrat heading the committee, proposed to exempt some non-financial institution businesses from the new agency's purview and drop a requirement that banks offer packages of simpler financial products.
Frank also addressed the question of ensuring that the possible future collapse of large financial institutions does not pose a systemic risk that could spark another financial crisis.
"We will be providing a mechanism for putting non-bank financial institutions out of everybody's misery," said Barney Frank. "There will be 'death panels' enacted by this Congress, but they will be for non-bank financial institutions that will not be considered too big to die."
Geithner said a new system needs to provide the authority and tools to dismantle, restructure or close large companies, and ensure that those that fail do not damage the nation's economy.
"It requires that banks pay for the costs incurred by the government and acting to contain the damage caused by bank failures," he said. "And this requires higher capital standards, more tough constraints on leverage across the board, with more rigorous standards applied to those who are the largest, most complicated and pose the biggest risk to the system."
Treasury Secretary Geithner told lawmakers that despite signs of improvement in the U.S. economy, they should not be complacent about acting on legislation, saying that the nation's financial system remains fragile and prone to further trouble.
Representative Frank has outlined an ambitious schedule of hearings in an effort to move reform legislation - a key priority of President Obama - to a vote in the House as early as November. Similar reform efforts are being discussed by the Senate Banking Committee.