U.S. Treasury Secretary Jack Lew spoke with Brendan Greeley on Bloomberg TV’s new flagship morning program, Bloomberg <GO>. Lew discussed how government can address the lack of access to banking in the United States, financial services’ rules and regulations and the benefits of Dodd-Frank.
On the IMF elevated the Chinese yuan, Lew said: “The U.S. dollar remains the reserve currency of the world for a good reason.” He added: “We’ve also had long, ongoing discussions with China about their currency practices. They have made commitments to us that will not intervene in ways that are unfair. And those are important commitments. And they know that we’re going to hold them to those commitments.”
On Dodd-Frank, Lew said: “As a result of the implementation of Dodd-Frank, we have a system that is safer and sounder.” He noted: “One of the things about Dodd-Frank is it’s not one-size-fits-all. Our regulators have a lot of tools to target what they do, how they do their business, so that it is tiered in terms of applying standards that are appropriate by size of institution.”
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Jack Lew: ‘Simple, Inexpensive’ Bank Access Needed
Jack Lew: Dodd-Frank Results in Safer, Sounder System
Jack Lew: Families Need Simple Financial System Access
BRENDAN GREELEY: I am here with Secretary Jack Lew. We’re at the Financial Inclusion Forum.
The goal, you have private actors and government agencies working together to get more households into the financial system.
To start with a very basic question, 7.7 percent of households do not have access to a bank account. What can the federal government do to fix that?
JACK LEW: Thanks for being here today, Brendan. We had a great session this morning. We’ll have sessions all day on financial inclusion where leaders from governments from around the world, finance and the not-for-profit sector are coming together to answer that question.
I think that the need for it is the place we all begin. We know that families that don’t have access to financial services have to live in a cash economy. That is very risky and they cannot plan and use their money well. They can’t save for the future and it is very much exposed to the kinds of illicit transactions that we all know we need to stop in a world that is increasingly focused on things like terrorism.
So there are all kinds of compelling reasons why government and the private sector should solve this problem. One of the things that needs to happen is that it needs to be simple and inexpensive for people to get connected to the system. We have heard through the panels —
GREELEY: To open a bank account.
Jack Lew: — to open a bank account and to get access to financial services, to build a financial history.
You know, here in the United States, we have 26 million people who don’t have enough financial credit history to qualify for a loan. If you get people into the system, they have the ability to organize with — if they hit the kind of bump in a road like a big medical bill, not to be bankrupted by it, if they have an idea for a business to be able to get a loan and expand.
It’s good for the economy. It’s good for families. And it’s not something that government alone can do. The financial — the sector has to be using its innovation and its ability to offer services where people are to make this a reality.
GREELEY: You talk a little bit about credit. Let’s just talk about basic financial services, opening a checking and a savings account, being able to make transfers. One of the problems right now for that basic service is that we see large banks and even some regional banks getting out of that business, moving away from deposit-taking because it’s not as profitable.
So if the first step is just opening a checking account, which lots of people don’t do, how do you stem that tide when banks want to get out of that business?
Jack Lew: You know, I actually think that are more and more institutions that are looking for ways to get back into that business, to have the relationship with customers who ultimately can be customers for a broad range of financial services if they stay in that system.
And the question is, how do you reduce the cost of providing the service so that it’s, as a business model, attractive and, as a consumer model, affordable?
One of the things coming out of this conference is some real-life commitments, commitments like the hope CDFI, opening new CDFIs in the Mississippi Delta, commitments like JPMorgan working with Accion and The Gates Foundation to put millions of dollars into providing affordable credit, access to financial services around the world.
And initiatives like Fair Isaac, the people who do FICO scores, coming up with an alternate way to build credit histories so that you can use the information that people have in their financial lives to determine whether or not they are creditworthy, even if they’ve never had a credit card.
GREELEY: We’re talking about private commitments.
What tools do you have at your disposal within Treasury to help nudge that forward?
Jack Lew: So let me give you an example. We have — we announced two weeks ago something called myRA being available nationwide.
Now what is myRA? It’s a starter retirement savings account. You can put as little as you want, $5 a pay period or even less into it.
Now if you were to go to the private marketplace, there are not a lot of IRAs out there where they’re happy to open accounts for $5 deposits.
Why is it important?
It is important because if people get started, they develop the habit of saving as they see $5 a week build up, they can see how they are taking care of saving for their financial future in a way that is not painful in terms of their day-to-day life. That is a hugely important thing.
And all they have to do is go to myra.gov to open an account.
GREELEY: Can Treasury do anything in terms of just basic checking accounts?
Because right now, the median amount that you have to start a checking account with is $100.
So is there anything in a regulatory way that you can do to just make it inexpensive, if not free, to just get started?
Jack Lew: You know, I think financial institutions and regulators are both looking at how to use some of the new technology to make, either through smart cards or phones, services available in a way that is less expensive than traditional bricks-and-mortar banking. I think some of the things being discussed here today are very exciting in terms of that becoming more of a reality, both in the United States and around the world.
And I think what we have to be clear about is there some roles that are for government, some roles that are going to be for the private sector, both the financial services sector and the not-for-profit philanthropic sector. I think one of the great things about the conversations yesterday and today are that this is not a question of finger-pointing and what should the other one do.
It’s a question of how do we do this together? How do we have the kind of clarity of information sharing and what the rules of the road are so we can together solve this problem?
GREELEY: One of the things that you hear private actors talk about a lot in this debate is the importance of credit. One of the things that you hear development experts talk a lot about is the importance of savings.
How do you get that right when obviously what profit there is isn’t supplying credit to smaller and smaller groups — when, in fact, from a development goal, even domestically here in the U.S., it’s savings that’s the most important?
How do you make the compromise?
Jack Lew: Savings and credit coexist in our financial system in small and large entities and households. You take a low-income household that is saving for retirement. They hit a medical emergency. They shouldn’t have to choose between depleting their small retirement savings or going bankrupt or not paying a medical bill.
There ought to be a way to have that paid over time in an affordable way that is not creating the kinds of risks that things like payday lending create for people.
There are products available that can do that. There is credit history available that can do that. It is not inconsistent with taking $5 or $10 out of every paycheck. Life has uncertainties in it. People either are going to have a nest egg to deal with those uncertainties or they’re going to need access to credit.
If you’re a small business and you’re expanding, your way to build greater income, to build great wealth is to invest in that business. But to invest requires access to capital. That does not mean you shouldn’t be saving out of your current income for your retirement.
So you have to be able to do both in our financial system and that is one of the things that financial inclusion is about.
GREELEY: I spoke one month ago to a bank in Natchitoches, Louisiana, smaller bank, less than $1 billion in assets and they have said something that we’ve heard a lot from smaller banks, which have been providing the credit to small businesses, which is that Dodd-Frank rules that are meant for larger banks are not working for smaller banks and they’re causing them spend a lot on their back office in terms of compliance money that they do not have.
What changes are you willing to contemplate to Dodd-Frank?
Jack Lew: Dodd-Frank was a response to the worst financial crisis since the Great Depression. And as a result of the implementation of Dodd-Frank, we have a system that is safer and sounder. And I think we have done an enormous amount to reduce the risk of another financial crisis that caused really almost inestimable damage to individuals and the collective economy of the United States and the global economy.
One of the things about Dodd-Frank is it’s not one-size-fits-all. Our regulators have a lot of tools to target what they do, how they do their business, so that it is tiered in terms of applying standards that are appropriate by size of institution.
We have encouraged regulators to use their regulatory flexibility to the greatest extent that they can so that they can be sensitive to the differences in risk
GREELEY: But some of this is going to require an actual statutory change. It’s one of the things that Daniel Tarullo has said at the Federal Reserve that they would contemplate, for example, he would support something that excused banks under I believe, $2 billion in assets from the Volcker rule, for example.
Is that a change that you would contemplate?
Do you think there are going to be any statutory law-based changes and not just regulatory changes?
Jack Lew: Well, I think that the Volcker rule right now only applies to institutions that are engaged in transactions that are the kind that, during the financial crisis, it was believed necessary to have more transparency into
Some of the proposals reflect a desire for clarity, which legislation can provide. I think it is important for regulators to use the flexibility that they have to provide the kind of flexibility that’s needed. One of the things I worry about in the legislative debate is the definition of small; it means different things to different people
For example, in terms of certain requirements in Dodd-Frank, suggestions have been made that a $50 billion threshold be changed to anywhere from $100 billion to $500 billion as if it is the same thing. It is not the same thing; $500 billion institutions are just enormous institutions. They’re amongst the largest financial institutions in the world.
The truth is, even $150 billion, $200 billion institutions are that large. So I think we have to be careful not to get into a conversation where we start rolling back some of the core protections that have made our system safer and sounder.
GREELEY: Let me ask you just real quick, we are short on time, but yesterday, of course, the IMF announced that it would include the yuan in its reserve basket.
Would the U.S. Treasury contemplate converting any of its holdings in reserves to yuan?
Jack Lew: You know, I think if you look at the U.S. dollar remains the reserve currency of the world for a good reason. And we are determined to run a U.S. economy that continues to be a strong, safe and secure economy that makes that the case in the future.
The decision made at the IMF yesterday reflected a long study by the IMF technical team. We made clear that we thought it was important that China meet all of the standards to be recognized as a currency in the special drawing rights basket. They met those requirements. We supported the action.
But we’ve also had long, ongoing discussions with China about their currency practices. They have made commitments to us that will not intervene in ways that are unfair. And those are important commitments. And they know that we’re going to hold them to those commitments.
GREELEY: OK. Secretary Jack Lew at the Financial Inclusion Forum.