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Published by: 83jjmack on Jan 24, 2012
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Remarks by
John Walsh
Acting Comptroller of the Currency
before the
American Securitization Forum
Annual Conference
January 24, 2012
Thank you. It’s a pleasure to be here with you today, and to have this opportunityto speak to a group that represents such a broad range of participants in the securitizationbusiness. Securitization is sometimes maligned and frequently misunderstood, and itsimportance to our nation’s economy is often not fully appreciated. Whether inmortgages, credit cards, auto finance, or student loans, meeting the needs of Americanconsumers depends heavily on securitization. It is hard to imagine full recovery of thefinancial system without the liquidity and funding avenues provided by a wellfunctioning securitization market. Certainly, it is hard to foresee a strong recovery for thehousing industry without securitization. And it seems unlikely we will experience strongand sustained economic growth without a rebound in the housing sector.Unfortunately, the fragile state of securitization is a result, in part, of its role in thefinancial crisis. While the principal trigger of the crisis was poor credit underwriting,particularly of subprime mortgages, securitization of those mortgages fueled the surge inbad lending by transferring risk from the originator of the loan to other investors. Thetranching of pooled instruments into different investment classes offered a means of matching risk and risk appetite, promoting the depth and liquidity of markets, but many1
of these financial structures did not withstand the stress of a market meltdown.Structured finance and the credit ratings on which it was based were discredited, andsecuritization itself came to be seen as a significant cause of the crisis in the financialmarkets.Clearly, a range of abuses triggered and sustained the crisis, and the Dodd-Frank Act took a number of steps to deal with them. And when I say a “number of steps,”believe me, I know all too well just how many steps there actually are. Since the day thatDodd-Frank was signed into law, we at the OCC and our colleagues at the other financialregulatory agencies have been devoting an enormous amount of time to implementing thelaw.Some of the provisions of Dodd-Frank were aimed at early identification of riskswith potentially systemic consequences, and at heightened supervision and orderlyresolution of systemically significant firms, particularly those outside the safety net likeAIG, Bear Stearns, or Lehman Brothers. Creation of the Financial Stability OversightCouncil, or FSOC; heightened supervisory standards for firms of systemic consequence;and FDIC orderly resolution authority are the responses to these challenges.Other provisions were directed at perceived sources of risk that were implicatedin the crisis, and would change the way certain businesses are conducted inside bankingentities and other financial institutions. The risk retention rule, the Volcker rule, limitson use of credit ratings, and derivatives regulation all fall into this category, and haveproven more controversial.The problems the Dodd-Frank Act tackled are very real, but the new law came atthem from many directions. Risk can be mitigated through activity limits or prohibitions,2
through increases in capital and liquidity requirements, through new standards forunderwriting or product offerings, through enhanced supervision and controls on risk taking and leverage, and through enhanced transparency and disclosure. Dodd-Frank does some of all of these things, in the process making very significant changes in theway business is done by financial institutions. There are so many moving parts that it isvery hard to judge how these many approaches will interact, or what their cumulativeeffect will be.In our rulemaking, the goal of the agencies must be to strike a balance that meetsthe objectives of Dodd-Frank, while enabling financial firms to continue conductingbusiness in a manner that is safe, sound, and profitable; ensuring appropriate monitoringand management of risk; promoting healthy and liquid markets; and supporting a strongand growing economy.The challenges we face in formulating some of these very complex rules offergood news and bad news. The news is good if you believe that the time it is taking todevelop consensus among diverse agencies defers regulatory burden; it’s bad if youbelieve that delay in implementation translates to delay in recovery of financial markets.Markets hate uncertainty and struggle with adjusting to the unknown.So let me turn to a couple of the issues on which we are working that I think areof specific interest to this audience, then finish with some thoughts on the role of derivatives in banking and financial markets. We’re in the midst of rulemakings thataffect these issues, so I will of necessity be somewhat more limited than I might like inwhat I can say. But these are extremely important matters, and it’s worth taking sometime to update you on where we are.3

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