Government and financial organizations are among the institutions the public now trusts the least. Both failed spectacularly in the years leading up to the financial meltdown of 2008. Today we face the challenges of restoring investor and consumer confidence, which go hand in hand with restoring confidence in government regulators.
Although not entirely intuitive, a good government regulatory system is the financial markets’ best friend for two reasons.
First, I do not believe the American people will fully trust the markets again until they believe that effective government regulators are in position. Second, aggressive competition without adequate enforcement of rules can drive financial firms to engage in a “race to the bottom” — even if practices are unsustainable or counterproductive for investors. As attorney general of New York, I often saw companies embrace risky financial practices.
Recognizing that financial services are central to New York’s economy, soon after I took office as governor we set out to address the mutual failures of our financial institutions and the regulatory system by creating a modern and effective regulator.
The Legislature created this new agency — the Department of Financial Services — from the archaic Departments of Banking and Insurance, both of which dated back to the 1850s. The Banking Department had not seen a substantial overhaul since 1932 — two decades before the first credit cards appeared.
The recent Standard Chartered settlement demonstrates that this new financial regulatory system is working. The Department of Financial Services confronted Standard Chartered for masking more than $250 billion worth of transactions with Iranian state-owned banks, private banks and unidentified corporations.
The bank’s actions were not only illegal, but dangerous. Iran’s money-laundering is not just a banking concern, but an issue of national security. Our national and state policy is to cut off the global financial lifeline upon which state-sponsored terrorism depends — and our regulators must have the resources and the power to enforce that policy.
Once the agency’s investigation determined there were egregious violations of law and regulation, it acted quickly and deliberately. Within a week of its announcing action, Standard Chartered agreed to pay a $340 million fine — the largest ever collected by New York state banking regulators.
Standard Chartered will cooperate in drawing up a plan that reforms its illegal practices and has also agreed to install a monitor who will report directly to the department, overseeing and auditing any work done out of New York to identify possible money-laundering. The department will maintain full access to check the bank’s work.
The Department of Financial Services proves that effective and efficient regulation is not bad for business. It protects the good actors and builds investor confidence — and that is good for everyone.
Andrew M. Cuomo is governor of New York.