Geithner: Banks need 'confidence' in rules

Treasury secretary says that the government needs more power to regulate financial institutions to help the financial markets rebound.

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By David Goldman, CNNMoney.com staff writer

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What do you think of Geithner's plan to enlist private firms in the bank bailout?
  • It's good - we need their money
  • It's bad - it won't work

NEW YORK (CNNMoney.com) -- Treasury Secretary Tim Geithner said Wednesday that increased regulation of financial institutions is a critical component of the nation's recovery.

"To get through this, we need the private sector to take risk," Geithner said at a meeting of the Council on Foreign Relations in New York. "In order to do so, they need confidence about the rules of the game."

Geithner said that some non-bank financial institutions were able to grow so large in the past few years, that their failure threatened to bring down the entire financial system. But the government's regulation of those institutions was too limited to deal appropriately with those companies.

"One of the key lessons of the current crisis is that destabilizing dangers can come from financial institutions besides banks, but our current regulatory system provides few ways to deal with these risks," Geithner said. "We are moving to ... modernize our 20th century regulatory system meet 21st century financial challenges."

On Tuesday, Geithner told a House panel that the bailout of American International Group underscored the limits of the existing regulatory structure. He called on Congress to grant the government greater powers to oversee non-bank financial institutions.

One proposal was to grant so-called resolution authority that would give the government power to reorganize or wind down a non-bank company, such as troubled insurer AIG (AIG, Fortune 500). Such powers would include selling off assets and subsidiaries, imposing limits on executive compensation and taking action on risky holdings.

Geithner said the full proposal will come "in the coming weeks," including "stronger rules to protect American consumers and investors against financial fraud and abuse." He is set to discuss the subject Thursday in an appearance before the House Financial Services Committee.

At the Council of Foreign Relations Wednesday, some council members questioned whether increased regulatory actions would put all of the risk on the taxpayers' shoulders and give any reward to the private sector.

Geithner countered that the government is the only entity that is capable of rescuing the economy, and risk and uncertainty will fall when the financial markets rebound.

"To solve financial crises, government need to be willing to take risks that the financial markets can't take," Geithner said. "We live with uncertainty now, and the basic objective is getting that down to acceptable levels."

Geithner is expected to present his regulatory proposals at the upcoming G-20 conference in London beginning on April 2. To top of page

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