Speaker 1:
From the Library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision in global business, the dream drivers that have made the NYSE an indispensable institution for global growth for more than 225 years. Each week we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's 12 exchanges and seven clearinghouses around the world. Now, here's your host, Josh King, Head of Communications at Intercontinental Exchange.
Josh King:
I always tell folks, "Keep your eye on trends in newspaper headlines." One trend you're seeing is stories about LIBOR, the London Inter-Bank Offered Rate. Case in point, American Banker Magazine last week quote, "LIBOR Not Quite Obsolete is Getting an Upgrade." Our guest today is the man behind the upgrade of LIBOR, here in the ICE House. His name is Timothy Bowler, President of ICE Benchmark Administration or IBA, it's a subsidiary of Intercontinental Exchange charged with managing various benchmarks, including ICE LIBOR, ICE swap rate, and the London Bullion Market Association gold and silver prices. Tim's living in London these days, but he's here in New York today on heels of a conference in Manhattan focused partly on the future of LIBOR.
Josh King:
For those of you who just know LIBOR from the fine print in your credit card disclosures, it's the interest rate benchmark often referenced in derivative bond and loan documentation and in a range of consumer lending instruments, such as those credit cards, but also mortgages and auto and student loans. It's also used as an important barometer of market expectation regarding central bank interest rates, liquidity premiums in the money markets, and during period of stress in the markets as an indicator of the health of the banking system. Our conversation with Tim Bowler right after this.
Speaker 1:
Inside the ICE House is presented this week by ICE Futures Europe and the ICE Brent Crude Oil Complex. Have you ever rolled up to the pump or heard a news report on rapid changes to the price of a barrel of oil and wondered why the price is different than yesterday? Most of the world's oil is priced relative to the ICE Brent Complex and ICE is where a large percentage of the world's crude oil derivatives are traded.
Josh King:
Tim Bowler joined ICE in October 2017 from Goldman Sachs, where he was a Managing Director of the Financial Institutions Group. This was his second stint at Goldman, which bracketed government service with the U.S. Treasury Department. Tim served as Counselor to Treasury Secretary Jack Lew and before that was Acting Assistant Secretary for Financial Stability. While in that Acting Secretary role, Tim oversaw the winding down of the Troubled Asset Relief Program, which we remember as TARP, including the bank bailouts that returned a significant profit to tax payers. While he was downtown at the Rates Conference, we thought we'd snag him for a few minutes to share the latest on LIBOR. Welcome, to the ICE House, Tim.
Timothy Bowler:
Josh, it's great to be here.
Josh King:
How was your reception at the Rates Conference? What was discussed and what did they think of your presentation?
Timothy Bowler:
Well, it was an interesting hour. We had an opportunity to present to over 225 fixed income investors and have an active and broad discussion around the future of LIBOR, its current place in the financial system, and how it might evolve. What became clear from my participation in the conference is extensive demand to keep LIBOR as a key interest rate benchmark on a go forward basis, alongside some of the new risk free rates that are being developed and sponsored by global central banks.
Josh King:
Why has LIBOR been called the world's most important number?
Timothy Bowler:
Well, I think quite simply it's because it's the most widely used benchmark in the capital markets and lending markets. By many estimates there's over $200 trillion worth of contracts that are linked to LIBOR and it's also widely used by some of the largest industrial companies in the world when they reference loans or lines of credit that they have with their banking relationships. In addition to that, Josh, it's also widely used in the capital markets. It's embedded in debt agreements and it's also widely used in the derivatives markets, in particular interest rate swaps.
Josh King:
What's the history of the rate?
Timothy Bowler:
It began really in the late 60s, early 70s in London when banks that were internationally active were looking for a rate to price syndicated loans. And over the course of the 70s into the early 80s, numerous banks started working in collaboration to create a benchmark that would be representative of average bank funding costs for banks that were making wholesale loans and other loans to their internationally active client base. In the mid 1980s, the British Bankers' Association took it over and became the administrator and it became a much more formalized process. And from there LIBOR then took off as a key global benchmark for really two reasons. First, just there was such explosive growth in the global capital markets at that point in time and in the global syndicated lending business at that point in time that banks really did demand an average interest rate to be able to offer to their customers when pricing credit. I think many of your audience might remember or might be aware of certainly in the mid 70s and 1980s interest rates were a lot more volatile than they have been over the last decade.
Timothy Bowler:
So LIBOR then became actively embedded into interest rate swaps and became the underlier for the risk free leg, if you will, in interest rate swaps. So you had a significant expansion in global lending activity, global capital markets activity, at the same point in time as you had a large growth in the derivatives markets where industrial companies, and retailers, and pharmaceuticals, and other large entities were looking for ways to manage their interest rate risk. So it became embedded into the derivatives markets as well as a key benchmark.
Josh King:
In a speech in July last year, Tim, Andrew Bailey, the Chief Executive of the UK's Financial Conduct Authority said that, "The UK regulator will no longer compel banks to submit to LIBOR from the end of 2021." Given all the success of LIBOR in the history that you related, why would Bailey come in and make that statement?
Timothy Bowler:
Well, I think Andrew Bailey was spot on. He laid down a marker for the banking industry that basically said for LIBOR to continue to exist as a key benchmark, it needs to be solely supported by the banking industry itself and on a voluntary basis. And from his perspective, and the FCA's perspective, and the global regulatory community's perspective they wanted to make certain that LIBOR could stand on its own as a key benchmark. And from our perspective, at ICE Benchmark Administration, it was actually a welcome opportunity for us to work with the global banking industry that supports LIBOR today, the 20 panel banks that submit interest rates that we use to calculate LIBOR, and other internationally banks that are active users of LIBOR based products to come up with a system and a framework that the banks and the banking industry would feel comfortable supporting LIBOR well past 2021 and that's a key priority of ours right now.
Josh King:
So our listeners have a clear sense of how ICE Benchmark Administration came into this position, how did the responsibility for LIBOR transition from the British Bankers' Association to IBA?
Timothy Bowler:
Well, that's a great story. So back in 2013, when it became apparent to the British government that the administration of LIBOR required a different entity than the British Bankers' Association, NYSE Euronext actually tendered for that role and was successful in winning that mandate from Her Majesty's Treasury. Then after winning that mandate, I think as your audience is well aware, Intercontinental Exchange acquired NYSE Euronext. And within the context of that acquisition, the management team at Intercontinental Exchange looked at how important LIBOR was to the financial system, saw that NYSE Euronext had won the tender and was committed to reforming, and improving, and evolving LIBOR in such as way that it remained a key and sustainable interest rate benchmark. And then decided that even within the context of the acquisition they would continue to play that role as the administrator of LIBOR, and for that matter the management team at Intercontinental Exchange invested even more resources and more dedication to continue to make certain that ICE Benchmark Administration, as the administrator of LIBOR, could be as successful as it possibly could be.
Josh King:
So Tim, you focused on that important period from 2012 to '13 and IBA's coming into the administration of LIBOR, what does LIBOR need to do to fully recover from the rate rigging scandal at the beginning of the decade?
Timothy Bowler:
Absolutely. For your audience benefit, in the last decade a number of individuals associated with banks that were submitting rates to LIBOR were found to be acting inappropriately and they were doing such by either artificially raising rates on LIBOR or artificially lowering rates on LIBOR within the context of some other goal that might have been important to themselves as a trader or what they perceived at that point in time to be important to the institution that they were working for. And the fact that they were submitting rates that didn't accurately reflect their borrowing costs, which is ultimately what underpins the economics of LIBOR and the benchmark itself, led to the integrity of the benchmark being called into question.
Timothy Bowler:
So from our perspective at IBA since taking on the role of the administration of LIBOR in 2014, we've invested every day in every way to make certain that the rate could have the greatest degree of integrity it possibly can be by making certain that the banks that we work with, the partner banks that we work with that submit rates to us as the administrator of LIBOR reflect the rates that they could actually transact at and borrow in the capital markets. And by doing so, ultimately we're working to restore the full integrity and confidence in LIBOR to make certain that those that use LIBOR truly do see it as a rate that best measures incremental borrowing costs or marginal costs for internationally active banks, which is what the benchmark is supposed to represent.
Josh King:
You can't miss references to the scandal in any articles you read, how do you think people are getting past it?
Timothy Bowler:
There's the old adage that those that don't learn from history are doomed to repeat it and certainly at ICE Benchmark Administration we've spent a significant amount of time learning from the mistakes and the failures of the past. And by investing in improved governance, improved oversight, and improve surveillance we think we've addressed a number of the core issues, if not all the core issues, that led to the inappropriate abuse of LIBOR in the last decade. And from our standpoint at ICE Benchmark Administration, the administrator of LIBOR, we're 100% committed to evolving our approaches to administrating and calculating LIBOR. We're 100% open to evolving how LIBOR is calculated in partnership with the banks. And case in point, just over the last couple weeks we've gone public with the fact that we'll be adopting a new and further evolved and improved methodology to calculate LIBOR on a go forward basis that both the users of LIBOR and those banks that support LIBOR are infinitely more comfortable with relative to what occurred in the past.
Josh King:
Back to that American Banker's story that I referenced earlier in our conversation, it lays out how you're changing how the major global banks submit quotes to LIBOR. What are the key differences between the past and the present?
Timothy Bowler:
Well, the key difference is ultimately if banks are transacting in the wholesale capital markets and obtaining funding in the wholesale capital markets, they must use those rates for their LIBOR submission or they must use those rates to inform their LIBOR submission such that LIBOR is anchored in transactional data to the greatest extent possible. And by doing so, what you're ultimately doing is taking the benchmark and much more rooting or grounding it in actual realized transactions in the banking industry and trying to move it away from the pure judgment of an individual or a collection of individuals at a bank.
Josh King:
Previously, it was just opinions.
Timothy Bowler:
That's exactly right.
Josh King:
And now, it's actual loans and actual transactions.
Timothy Bowler:
It's a combination of all those factors. So if a bank transacts, they must use that rate. If a bank has transacted in the recent past, they must use that transaction to inform their submission and anchor their submission. If they haven't transacted in the last 24 hours or if they haven't transacted in the most recent past, they must use other data indicators or other data market barometers to inform their submission. They must evidence that to us to make certain that we're comfortable that the submission that they are providing us accurately represents their wholesale cost of funds.
Timothy Bowler:
And the reason why we've broken it down into those three pieces where they're a waterfall approach if you will, you must use the rate that you transacted at over the last 24 hours, if you haven't transacted in the last 24 hours you must use a rate that is informed by your most recent series of transaction, and if you can't fulfill those first two steps you use expert judgment to quote to LIBOR, the reason why designed this new approach that way is to make certain that LIBOR in and of itself is grounded in transaction to the greatest extent possible, while also making certain that LIBOR can be published on any given day. Because when you think about it, during certain holiday periods towards the end of the year or during the summertime, banks funding needs might wane at that point in time, but we still have to publish LIBOR every day so we need the support of the banks every day in order to be able to calculate and publish LIBOR.
Josh King:
Have you seen eyes open up when you've actually started using the imagery of the waterfall?
Timothy Bowler:
I think the one theme that we continue to get from stakeholders on this issue is, "Wow, Tim and the team at IBA, that makes a lot of common sense. You've designed an approach to basically calculate and maintain LIBOR in such a way that makes a lot of just simple common sense."
Josh King:
This idea of the waterfall is not just an idea that you put up on a whiteboard and sent out to the banks for their views, you've actually tested this methodically.
Timothy Bowler:
Taking a bigger step back, the use of a waterfall methodology was one of the key recommendations that came out of the official sector review of LIBOR post the financial crisis and when it became apparent to the global markets that LIBOR was broken and needed to be reformed and evolved. So one of the key things that came out of the official sector review was that a waterfall approach was the most prudent process in order to anchor LIBOR to the greatest extent possible and realize transaction in the bank funding markets. So from our perspective, it provides a good framework that we've adopted based upon a lot of excellent and outstanding work that was really spearheaded by the official sector back in 2012 and 2013 to create a framework that we can continue to grow and evolve from over time.
Josh King:
And so how did you administer the tests and what did the tests reveal?
Timothy Bowler:
We worked with the banks, gave them the new mandate to be able to submit LIBOR to us using the waterfall methodology alongside their current submission process. We did that over a number of months at the end of last year to make certain that the banks were, from an operational and technology perspective, prepared to make the shift. Our perspective at ICE Benchmark Administration and the feedback we received from our participants after releasing the test data, there was a lot of comfort with what they saw back that how banks would quote to us and how we would then take those quotes to produce LIBOR was representative of what it's supposed to be, which is the average marginal unsecured cost of funds for banks.
Josh King:
You released the test data on a Saturday when all markets were closed.
Timothy Bowler:
Yes.
Josh King:
Was that a-
Timothy Bowler:
It was just giving a chance for market participants to be able to assess how LIBOR might change over time, and doing it in a way that's controlled, and give them a 36 hour time period to be able to look and study the data to see how that might impact their thoughts around LIBOR, give them a chance to come back to us and ask questions, and then allow them to understand why and how the process of evolving LIBOR is occurring. And from our perspective, for us to be able to tell the story to the capital markets, why we think the new methodology that we're using is a vast improvement of what was done in the past, and also a framework that we can continue to evolve for in the future.
Josh King:
... What was some of the feedback you received over those 36 hours and really the seven days that followed?
Timothy Bowler:
This makes sense. As I said to you earlier, Josh, the one theme that continues to come up in every conversation I have about us evolving the methodology and our approaches to LIBOR is, "Wow, that makes a lot of sense. That's a common sense approach to how to do this. You guys are using a lot of common sense to create a framework that LIBOR can remain in the global capital markets, have integrity, and can continue to evolve over time as market conditions change and as the banking industry changes."
Josh King:
It's a fully voluntary process to having banks submit their data to establish LIBOR, why would the leading banks participate on this voluntary basis?
Timothy Bowler:
Well, I think first and foremost it's because their clients want to continue to use LIBOR. I mean, ultimately the banking industry is successful when it serves its clients and the clients of the banking industry continue to want to use LIBOR as a benchmark for their lending transactions, for their capital markets transactions, and their risk management transactions. And I think the clients and the customers of the banking industry feel that their loans and their capital markets transactions are priced fairly when LIBOR is the underlying benchmark.
Josh King:
Simplicity counts, Tim, a pretty complex set of currencies and tenors in the prior LIBOR and the current LIBOR, how do you winnow down the universe for tomorrow's LIBOR?
Timothy Bowler:
Well, that's going to be a process that we're going to work with our partners in the global banking industry that support LIBOR, which is we're going to ultimately survey them over the course of the second half of 2018 to help them identify for us what are the critical LIBOR currency and tenor pairs that are truly important to their customer base and their client base. And then with that feedback, we'll be able to design a future for those critical or very important LIBOR currency tenor pairs such that the benchmark can continue hopefully well after 2021. But then we can also work with users of LIBOR on the capital markets that might transact in or have reference to very infrequently used LIBOR currency tenor pairs and try to identify other benchmarks that might be more appropriate for them to evolve too over time if we're not able to publish those certain currency or tenor pairs post 2021.
Josh King:
Just for our listener's benefit, how vast are the currency and tenor pairs today?
Timothy Bowler:
Well, there's currently five currencies that we support in LIBOR. There's sterling, there's dollars, there's yen, there's Swiss Francs, and Euro LIBOR. And for each currency there's seven underlying tenors ranging from overnight to 12 months, but for the vast majority of financial contracts they either reference one month, three month, or six month LIBOR because those tend to be the term settings that borrowers want to embed in their lending agreements or those that use the derivatives market want to embed in the floating leg of their interest rate or currency swaps.
Josh King:
So Tim, talking about winnowing down the complexity, the New York Fed is working on another dollar denominated rate called the Secured Overnight Financing Rate or SOFR. What does it do and can it exist side by side with LIBOR?
Timothy Bowler:
It's a great question, Josh. So the Secured Overnight Financing Rate or SOFR is a benchmark that is produced by the Board of Governors of the Federal Reserve in conjunction with the Office of Financial Research, in conjunction with the New York Fed. And it's an index that represents the average overnight repo rate that occurs in the U.S. capital markets for repos that are collateralized by United States Treasuries. And it is an interesting rate and one I think that will play a meaningful role in the capital markets over time because it serves as a proxy for where investors can invest overnight funds and earn return on a risk free basis. And the reason for that is because those transactions, those overnight repo transactions as I mentioned earlier are collateralized by Treasuries, that essentially makes them risk free transactions because if something were to go wrong with the underlying counterparty to the repurchased transaction the lender in that instance could have access to that collateral to make certain that they were paid back.
Timothy Bowler:
My sense is, getting to your second question, is that LIBOR and SOFR can absolutely coexist in the capital markets because they fundamentally do different things. So if you think about contracts, financial contracts that want to embed in them a reference to a true risk free rate, SOFR could be a very attractive and powerful choice. If you're looking at financial contracts in which you want to reference the term cost of funds on average for banks, LIBOR is a very attractive choice. So our sense is by offering up to the markets choice and letting the markets choose what's the most appropriate benchmark for them, you're going to have a healthier and more sustainable capital markets.
Josh King:
So all of the reporting that went into looking at Andrew Bailey's speech in which the reporting tended to be, "Bailey says LIBOR could be gone after 2021," not a forgone conclusion. What has to happen to make sure that that's the case?
Timothy Bowler:
There was a lot of headlines that basically came out and said, "LIBOR's going away after 2021," and that's not what Andrew Bailey said. Andrew was very clear that after 2021 that LIBOR's going to have to be supported on a voluntary basis by the banking industry and that the FCA would no longer use its powers of persuasion or compulsion to support the rate. But certainly the FCA is encouraging the banking industry to try to find a path forward on a voluntary basis for LIBOR given how important it is for the global financial system. Secondly, within the context of how LIBOR is used in the global financial system there is a significant degree of support for trying to find a voluntary path forward and that's what we're actively engaged with right now with the banking industry that helps provide the inputs to the LIBOR and the users of LIBOR as a key rate in both the lending markets and in the capital markets.
Timothy Bowler:
And the third point I would make is within the context of evolving capital markets and evolving financial conditions we see a real interest in having a system that has new risk free rates that get introduced, such as SOFR or SONIA in the United Kingdom, alongside the retention of LIBOR and key currency and tenor pairs such that investors, and borrowers, and risk managers can have a choice of what's the most appropriate benchmark for them. And from our position at IBA, that's what we're trying to deliver to the capital markets and that's what we're trying to deliver to the financial system, an evolved LIBOR that can continue to be published on a consistent basis after 2021 with a great deal of integrity.
Josh King:
I'm sure LIBOR is such a focus of your work at IBA, Tim, that it's even crept into your dreams. But-
Timothy Bowler:
I can definitely say, it has not crept into my dreams. I can be definitely clear about that, Josh.
Josh King:
... But share a little bit more about what ICE Benchmark Administration does beyond LIBOR, certainly the gold and silver prices are key rates across the world.
Timothy Bowler:
Well, yeah. ICE Benchmark Administration's a remarkable organization, particularly given the fact that it's only been in existence for around four years. As the majority of this conversation has been on LIBOR, but as you mention, we also provide the global benchmarks for gold and silver. So every day we run large and deep auctions to establish benchmark prices for gold, we do that twice day, once at 10:30 in the morning in London and once at 3:00 PM in London to make certain that both Asian markets and U.S. markets have the chance to weigh in on global prices for gold. And we also do it every day at noon in London to set the global benchmark price for silver. In addition to that, we also provide the global benchmarks for the interest swaps markets in dollar, sterling, and euros. We do that through the ICE Swap Rate in which we work in conjunction with market data providers and staff some multilateral trading facilities to extract data, transactable data from the capital markets to be able to publish a stable benchmark for dollars, sterling, and euro interest rate swaps.
Timothy Bowler:
And then finally, we've developed a very interesting, and new, and unique tool for those active in the derivatives markets called the ISDA SIMM Crowdsourcing Facility. And this is, as I mentioned, a very innovative tool where we're helping investors work with dealers to set the appropriate levels of initial margin for unclear derivative transactions. So those derivative transactions that can't flow through an exchange in which initial margin needs to be posted to make certain that both counterparties are safe in the event of one counterparty defaulting.
Josh King:
Share what ISDA is.
Timothy Bowler:
Oh, that's the International Swap Dealers' Association, so it's the trade body that works with those dealers and investors that are active in the global derivatives markets. And in coordination with that entity, we've developed this new crowdsourcing facility to allow the asset management community and the dealer community to be able to vote and be able to represent electronically through this voting mechanism what they view as the underlying risk associated with derivative positions that are unclear such that the initial margin thresholds can be set in a much more democratized way. As opposed to the asset management community just purely having to take whatever the dealer community submits to them.
Josh King:
The last three decades, Tim, of finance have been the story of technology and innovation.
Timothy Bowler:
Mm-hmm (affirmative).
Josh King:
Has the introduction of artificial intelligence sophisticated data sets and their near instantaneous connectivity changed the benchmark business across all of these rates that we've been talking about in the same way that it's affected the rest of the markets?
Timothy Bowler:
Absolutely. Enhanced technology has allowed our processes to publish benchmarks become much more efficient and much more automated. The streamlined process now that we use to be able to calculate and publish LIBOR is much more robust, has a greater degree of integrity to it, and a greater degree of liability. We've introduced significantly enhanced technology to our benchmark auction processes for gold and silver that are light years ahead of where those processes were at the beginning part of this decade. And for how we interface with those that are active in the derivatives markets to set benchmarks for swap prices, we leverage hundreds of data points in the calculation of ICE Swap Rate for dollar, sterling, and euros and do that in such a way that we feel is transactionally robust, as well as one in which we can go back and do further diligence on if necessary.
Timothy Bowler:
And then finally, and perhaps most importantly, we've incorporated advanced technologies in our surveillance of all of our benchmarks. Those that don't learn from the mistakes of the past are doomed to repeat them and in this instance we've invested significantly in technology and computer input to be able to go back and do back testing on all of our benchmarks to try to spot anomalies if and when they occur, to be able to interface with those that are giving us information that feed into our benchmarks, to make certain that what they are giving us is appropriate information and appropriate measurements that should be accurately reflected in the benchmarks that we're publishing. So technology has been absolutely critical to our organization and I see it being a big part of our organization on a go forward basis.
Josh King:
After the break, our conversation with Tim Bowler continues as we go back in time to revisit the financial crises that shaped and steeled Tim for the effort he's waging today to rebuild LIBOR.
Speaker 1:
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Josh King:
Back now with Tim Bowler, President of ICE Benchmark Administration. Let's rewind the clock, Tim. You worked for JP Morgan before moving to Goldman Sachs, how did you end up at Goldman's FIG group?
Timothy Bowler:
In the middle part of the last decade, when I was at Goldman Sachs, they needed people that had a deep understanding of the financial markets to move into their financial institutions world because as became apparent, things were changing and risk management expertise and markets expertise were going to be very important for banks, especially finance companies and other entities that were going to be tested by the crisis that obviously manifested itself in the latter part of the decade.
Josh King:
So here comes the financial crisis, 2007, 2008, what role did you play in advising financial institutions and governments through the turmoil?
Timothy Bowler:
First and foremost, during the financial crisis the most important advice that we could give to any institution, whether they're a bank, especially finance company, or for that matter, many governments during that time period, was make certain you have an appropriate amount of funding because ultimately during that period it was a liquidity crisis. Or for your listeners, in more plain English terms, basically money became exceptionally scarce and the ability to obtain credit and funding in the capital markets became exceptionally difficult. So job number one as an advisor to entities during that time period was helping them to the greatest extent possible source liquidity, to make certain that they could continue to provide the core services that financial institutions are supposed to do, which is ultimately taking the funds that they have and lending those out to the real economy to support economic activity and growth.
Timothy Bowler:
It was then working with these institutions to make certain that they were appropriately capitalized. I think as well documented and I'm sure well understood by your audience, banks during the last decade and other financial institutions certainly did not hold enough capital relative to the risk that was on their balance sheets. So in my function as an advisor to financial institutions, it was helping them find the most efficient ways to go out and raise equity capital to strengthen those institutions and strengthen those institutions in the eyes of all stakeholders.
Timothy Bowler:
And then finally, once the crisis began to subside, and liquidity conditions or lending conditions in the markets began to normalize, and it became clear that on the back of a number of programs that were put in place and significant capital raising by the banking industry in particular that the financial system was going to be stable. Then it was all about working with banks and other financial institutions to figure out what was the right path forward for them to serve their customers on a go forward basis post the financial crisis. So it was thinking about what business lines they should be in, what services they should be offering their customers, how they should be interfacing with their customers in a way that was much more appropriate and much more sustainable, that's where we spent a lot of time giving advice to those financial institutions as they needed to evolve coming out of the crisis period.
Josh King:
Your history since then has been about building safeguards against repeat of something like the financial crisis. Thinking about your time with Geithner and Lew at Treasury, what are the most enduring bulwarks against something like Bear happening again?
Timothy Bowler:
We have significantly enhanced liquidity regulations in the global banking system and in the global financial markets now that will provide a very strong and smart safe gap to having a repeat of what we saw in the last decade, in which banks were being drained nearly overnight of their funding and they had to lean on government resources in order to be able to continue to serve their customers. The banking system, within the context of the regulations that came out after the financial crisis, is in a wholesale different place than where it was on how its managing liquidity and that's going to put the system in a much more safe place to be able to manage stress if and when it occurs in the future.
Timothy Bowler:
Secondly, we have far superior capital regulations now in place and the amount of capital that's in the financial system today is nearly double what it was back in 2007. And capital ultimately leads to strength because it allows for loss absorption, but it also leads for greater confidence from stakeholders that use those financial institutions. And then third, banks, and other financial institutions, and other intermediaries have just focused on the business that they're supposed to be in. Right now, banks have cut back on a lot of the extraneous businesses that they were in that got them into a lot of trouble. We've migrated away from banks warehousing all kinds of risk that they couldn't manage and all kinds of counterparty risks into using cent clearing and CCPs as a core warehouse of intermediaries to manage credit risk and manage credit risk in a much more appropriate way without necessarily embedding it systemically in financial institutions that can't handle it.
Timothy Bowler:
And we have a significantly enhanced level of transparency in the financial system that did not exist in the last decade in which we're not having hidden sources to leverage embedded into financial institutions or into financial contracts in a way we didn't in the last decade. And you put all those things together and I think when people look back at the crisis and then the response to the crisis, they'll say, "A lot of common sense was used. A lot of appropriate frameworks were put in place to make the system safer through better liquidity, better capital, and a lot of better processes around how business is executed in the financial system."
Josh King:
When you left Treasury, Tim, in 2015, U.S. government had received $442 billion in repayments and other income from TARP. That was $14 billion more than it had spent at the time, good profit, was that an important indicator to know if the program was successful and an added benefit?
Timothy Bowler:
Well, clearly job number one was making sure that the taxpayers were returned every dollar that they put out to the global financial system and making certain that the taxpayers earned an appropriate return on the risk that they took when TARP was put in place in order to support financial institutions that were just so vital to economic activity in this country, and for that matter vital to global economic activity. In addition to that, I also would measure the success of TARP from the standpoint that we went through the most significant shock to the financial system that's occurred since The Great Depression of the late 20s and early 30s and we did that in such a way that we were able to recover from that shock at a much more rapid clip than certainly that manifested itself when this last occurred nearly 80 years ago.
Timothy Bowler:
So if you look at where unemployment is today, if you look at where economic activity is today, if you look at where financial markets are today and we're starting to finally see real, sustainable wage growth in this country, we recovered so much faster than almost any other financial crisis throughout human history. And I think a lot of that's due to the wisdom that was used back in 2008 and 2009 and then followed up through improved regulations in 2011, 2012, and thereafter.
Josh King:
A place in the world where recovery is a little harder, Tim, Puerto Rico.
Timothy Bowler:
Yeah.
Josh King:
One of the lesser known aspects of your government service was your efforts to address the economic instability in the commonwealth years before Hurricane Maria savaged the island. We're now seven months since Maria made landfall. We're looking ahead to another hurricane season that'll start in June and even as the focus remains on rebuilding, what are the ways the public and private sectors could work better to put Puerto Rico on more of a long term road toward financial health?
Timothy Bowler:
Well, I mean, from my perspective, and this is something I was very actively involved with the United States Treasury back in 2014 and 2015 so it's been a couple years, but my guess is and my understanding is that a lot of the core issues are still the same. The commonwealth of Puerto Rico has a great foundation for sustainable economic growth over the long haul. They just need... The people of Puerto Rico, the political establishment of Puerto Rico needs to continue to work with the federal government and those other entities that are so supportive of recovery in Puerto Rico to make certain that the economic model that evolves out of the island is sustainable over the long haul, and one that is not relying on debt financing in order to meet budget gaps, or isn't relying on temporary increases in government funding, or other types of one off sources in order to support economic activity, but rather really just focuses on what the island's core strengths are around manufacturing, being a potential transportation hub.
Timothy Bowler:
Obviously a key center for tourism, the island is poised for economic growth because of some of the natural advantages that it has. Notwithstanding that, I think we in the United States have a responsibility to the citizens of Puerto Rico who are U.S. citizens to make certain that they're getting the relief that they need coming out of the devastating effects of Hurricane Maria last year.
Josh King:
Another part of the country that has long taken it on the chin but is still dripping with potential if done right, Detroit Motor City. Before joining ICE, Tim, you spent a lot of time on mortgage lending in Detroit. We read a lot of stories about how economic activity is beginning to return, particularly in the inner city, what are the ways it becomes sustainable?
Timothy Bowler:
Well, Detroit is a place that holds a special place for me in my heart. After I left Treasury in 2015, I moved to Detroit and volunteered for Mayor Duggan in which I worked on a number of projects for the Mayor and the Land Bank there, which were all focused about doing two things. One, making certain that Detroit was appropriately approaching how they dealt with legacy abandoned properties and foreclosed properties, to make certain that those properties that didn't have a viable economic future could be rehabilitated to green space to allow those other existing homes in those neighborhoods to flourish.
Timothy Bowler:
And then secondly, spending a significant amount of time helping design lending programs and housing programs in the city that would make it attractive for people to move back to the city or gain access to mortgage credit throughout the districts of Detroit, and in particular trying to set a whole new framework for establishing lending comps in various neighborhoods through Detroit to help access mortgage credit for those folks that wanted to move back to the city or wanted to buy their first home in the city. And so those are a couple projects that I worked on that I'm deeply grateful that I've had the experience to spend time on after leaving the Treasury Department.
Josh King:
As you think about the things that you focused on before coming to ICE Benchmark Administration, they do focus on the provision of capital lending, the things that you're talking about just today in Detroit, about the access to capital. As you work every day to focus on the future of LIBOR, do you make that mental connection between the rate that you're trying to secure for the future and the ways it gets used in places like Detroit?
Timothy Bowler:
Absolutely. I mean, ultimately why does the financial system exist? It exists in order to take savings and capital that needs to be put to work and get it plugged back into the real economy to support economic growth. And the financial system, for it to be able to function to the greatest extent possible and at its optimal point, it needs appropriate benchmarks, it needs appropriate measurement tools. And that's something that we try to provide to the global financial system, whether it be through our LIBOR benchmarks, or our benchmarks for precious metals, or our benchmarks for term interest rates those are just absolutely vital to fair, and functioning, and sustainable capital markets that when they work, there's been no greater growth engine over time in human history to be able to expand economic activity, which ultimately improves people's lives.
Josh King:
Tim, thanks so much for joining us in the ICE House today.
Timothy Bowler:
You're welcome, Josh.
Josh King:
That's our conversation for this week. Our guest was Timothy Bowler, President of ICE Benchmark Administration. If you like what you heard, please rate us on iTunes so other folks know where to find us. If you've got a comment or a question you'd like one of our experts to tackle in a future show, email us at [email protected] or tweet at us @nyse. Our show is produced by Pete Asch and Ian Wolff, with production assistance from Ken Able. I'm Josh King, your host, signing off from the Library of the New York Stock Exchange. Thanks for listening, talk to you next week.
Speaker 1:
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