David Walker Testifies Before House Committee on Financial Services Oversight

May 17, 2010 David Walker

On Thursday, May 6, David Walker, the John A. Largay professor at Georgetown’s McDonough School of Business, testified before the U.S. House of Representatives Financial Services Oversight and Investigations Subcommittee on the topic of “The End of Excess.” Below is a transcript of his remarks.

Chairman Moore, Ranking Member Biggert, and subcommittee members, thank you for this opportunity to testify in front of the House Financial Services Oversight and Investigations Subcommittee. I am David A. Walker, the John A. Largay Professor in the McDonough School of Business at Georgetown University.


Large firms that are managing their risk effectively are not necessarily too big, and our economy needs their services. Some mismanaged firms needed greater regulation; some aggravated the financial crisis; and many of those have already failed. Breaking up a large firm whose balance sheets show unreasonable risk would be much preferred to future bailouts.

I would like to offer three recommendations: (1) to merge the Office of Thrift Supervision into the Office of the Comptroller of the Currency as soon as possible; (2) not to subject small, insured depository institutions to unnecessary, additional capital restrictions; and (3) to assign consumer financial protection responsibility to the FDIC without creating a new agency and an additional bureaucracy.

For the record, I have submitted copies of a peer reviewed study on “Long Run Credit Growth in the U.S.,” co-authored with Dr. Thomas Durkin, former senior economist with the Federal Reserve, and my Georgetown colleague Professor Keith Ord, and a policy paper on “Impacts of TARP on Commercial Banks” I co-authored with Max Gaby.


The issue Durkin, Ord, and I analyzed is how levels of consumer credit have changed over the past 60 years. We show that aggregate real consumer credit, adjusted for price changes and, excluding mortgage credit, has increased at the same annual rate as real U.S. disposable income.

Conclusions with regard to mortgage credit are very different. With subprime lending, lenders not documenting applicant credentials, and borrowers accepting obligations far above what they could possibly repay, every segment of the mortgage industry had abuses.

Perhaps, the greatest problem in the housing crisis was poor “supervision” by the Office of Thrift Supervision. IndyMac and Washington Mutual were failing thrift holding companies, supervised by the OTS.

I believe that if all holding companies were supervised by the Federal Reserve, the results could have been somewhat different. This would be just one more example where the independence of the Federal Reserve is essential.

I am a strong proponent of merging the OTS into the Office of the Comptroller of the Currency, and I wish the Congress would pass a separate bill to accomplish this before dealing with all the complexities of financial regulation.


Mark Flannery (a senior finance professor at the University of Florida) has proposed requiring large banks to hold debt instruments, which he calls, Contingent Capital Certificates. They would automatically convert from debt to equity, if the market value of a large bank’s equity fell below an established threshold. This eliminates regulatory delays and negotiations when a large bank might be in jeopardy.

Leverage of insured depository institutions can be examined via a simple risk ratio:

(Liabilities – Deposits)/Tier 1 Capital,

which distinguishes bank risk levels excluding deposits. My preliminary research shows that differences in risk for large banks and S&Ls versus small institutions can be identified by this ratio.


I recommend that you NOT create a new government agency for Consumer Financial Protection. Please consider placing the responsibility within the FDIC. The FDIC is an independent agency, with separate budget authority, that has many necessary consumer protection systems already in place, and an existing consumer affairs department. The FDIC is ideally suited to implement the consumer financial protection that the Congress deems necessary.


The U.S. aggregate fiscal debt and annual fiscal deficits have increased dramatically since World War II under both Republican and Democratic administrations. When the IMF commits financial support to a country, the Fund usually establishes country target maximum five percent ratio of fiscal deficit to GDP. For 2010, the U.S. fiscal deficit ratio is projected to be 11.1 percent.

We need to reduce U.S. deficits or it is highly likely that we will have serious inflation. There are surely areas where spending can be reduced.

I urge the Subcommittee to do everything possible to avoid burdensome regressive taxes, like a value-added tax, to deal with the U.S. fiscal deficit.