WASHINGTON Treasury Secretary Jack Lew vowed Thursday that regulators will release a strict version of a long-awaited regulation that would ban proprietary trading and investment in hedge and equity funds by banks.
"Rule-writers will soon put forward a tough Volcker Rule that I expect to be true to President Obama's vision and the statute's intent," said Lew in prepared remarks before the Pew Charitable Trusts.
Lew said the rule would stop banks from making risky trades with taxpayers' money, while still protecting firms' ability to do market making activities, such as selling bonds.
He also stressed that the final rule would prohibit risky bets like JPMorgan Chase's $6.2 billion trading loss known as the "London Whale" and would put in place strong compliance requirements.
The financial system, he said, is now much safer with new tools at regulators' disposal, including the Volcker Rule, resolution authority to seize and unwind megabanks, and higher capital and liquidity requirements.
"Part of ensuring that financial institutions bear their own risk is to make certain they have sufficient capital to absorb losses they may face," said Lew.
U.S. regulators this summer released a set of capital rules that banks will need to begin complying with in January. But more safeguards are in the works, including a leverage proposal and prudential standards for banks with $50 billion or more in assets, he said, noting that both plans will soon be finalized.
Lew acknowledged the time it has taken regulators to implement many of these provisions in the Dodd-Frank Act, such as the Volcker Rule. But he said the right course of action is ensuring that regulators achieve the correct balance.
"While the process of putting these reforms in place has taken longer than we hoped, much has been done, and much is being completed," said Lew, who set a target date of year-end for regulators to complete remaining rules.
"Ultimately, the measure of our success will not hinge on how fast regulations were put in place, but whether we strike the right balance. That is, maintaining deep, liquid financial markets that promote strong credit creation and lending, and protecting our economy and the American taxpayer from excessive risk-taking."
Lew said the true test of whether these tools under Dodd-Frank will work won't come until the next crisis, but it's clear improvements have already been made.
"Dodd-Frank ended 'too big to fail' as a matter of law; tough rules are now in place to make sure banks have the capital to absorb their own losses; monitoring through stress tests is underway; and resolution authorities and plans are in place," said Lew.
The Treasury secretary also stressed the necessity for Congress to provide regulatory agencies with adequate funding to do their jobs or else put Americans at risk for financial threats.
"Even in tight budgetary times, this is not a budget-driven choice, and we must provide regulators with sufficient resources to make the financial regulatory system work and protect working families from financial harm," said Lew.
Looking ahead to next year, Lew said he will strongly encourage further international cooperation by foreign countries to act faster to comply with new global rules.
"Our 2014 agenda is this: We will take steps to make sure that global banks meet the high standards we have set. That means moving swiftly to build strong and high-quality capital, properly weight risk assets, curb leverage, and build strong liquidity buffers to protect themselves in times of crisis," said Lew.
While the U.S. has moved ahead faster in many areas of reform, Lew said it's vital that other nations across the globe implement these recommendations as well, warning of the risks of an imbalanced system.
"There will be difficult cross-border issues to manage, and these are made more complex because other nations are moving far more slowly than the U.S.," said Lew.
The secretary said next year's agenda would be focused on completing work internationally to establish home and host authorities to wind down globally active firms, developing a new financial benchmark to replace LIBOR, and addressing risks tied to short-term wholesale funding and shadow banking.
"We are leaders in the international efforts to develop enhanced measures for all types of financial institutions, and working to align these approaches with the strong U.S. frameworks," said Lew. "Our aim is clear-we want a global race to the top."
But not all agreed with Lew's assessment that the current set of reforms under Dodd-Frank have ended "too big to fail."
Sen. Sherrod Brown, D-Ohio, argued it was too early for Lew to say regulators have met the test of whether further reforms would be necessary in eliminating to "too big to fail."
"It is premature for anyone to take a victory lap when 'too big to fail' policies are still alive and well," said Brown, a co-author of a "too big to fail" bill with Sen. David Vitter, R-La. in a press release. "Despite what some on Wall Street and in Washington may say, our work is not finished."
Vitter went even further to suggest Lew was "living on another planet" in thinking regulators could claim a win.
"Independent study after independent study shows that 'too big to fail' is alive and well with the Wall Street megabanks and they still enjoy a cost of funding advantage over their smaller competitors," said Vitter.