WASHINGTON — Treasury Secretary Tim Geithner appeared to criticize a proposal Thursday to force banks to divest their swaps desks.
At a hearing of the Financial Crisis Inquiry Commission, Geithner is expected to testify that any provision of the regulatory reform bill that attempts to wall off banks from risk can make the system riskier.
"To create stability, some argue, we should just separate banks from 'risk,' " he said, according to written testimony. "But, in important ways, that is exactly what caused this crisis. The lesson of this crisis, and of the parallel financial system, is that we cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for businesses and help businesses hedge risk, and move them outside banks, and outside the reach of strong regulation."
Although he did not explicitly mention the derivatives provision that is part of reform bill, Geithner's comments appear to refer to it. Under the bill by Senate Banking Committee Chairman Chris Dodd and Agriculture Chairman Blanche Lincoln, any bank that receives federal assistance, including deposit insurance, must spin-off its swaps desk. The provision is designed to ensure derivatives activity does not threaten the bank, but federal regulators have said it will instead force most derivatives trading into less well-regulated parts of the economy.