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WHEN: TODAY, THURSDAY, September 15, 2016
WHERE: CNBC'S "CLOSING BELL"
Following is the unofficial transcript of a FIRST ON CNBC interview with Former Treasury Secretary Larry Summers today on CNBC's "Closing Bell." Following is a link to video of the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000551428.
All references must be sourced to CNBC.
EVANS: WELCOME BACK. TODAY MARKS EIGHT YEARS SINCE THE FALL OF LEHMAN BROTHERS AND THE FINANCIAL CRISIS ON SET. FORMER TREASURY SECRETARY LARRY SUMMERS CO-AUTHORING A BROOKINGS PAPER SAYING SINCE THE CRISIS NEW LAWS HAVEN'T MADE BIG BANKS SAFER.
GRIFFETH: MR SUMMERS JOINS US NOW IN A FIRST ON CNBC INTERVIEW. THANKS FOR JOINING US.
SUMMERS: GLAD TO BE WITH YOU.
GRIFFETH: BY MANY ACCOUNTS DODD-FRANK AND OTHER THINGS THAT WASHINGTON HAS DONE ON THE BANKING INDUSTRY BY RAISING CAPITAL REQUIREMENTS BY DOING THE STRESS TEST, BY RESTRAINTS ON RISK MANAGEMENT AT THE BANKS, THAT THEY ARE SAFER TODAY THAN THEY WERE EIGHT YEARS AGO. WHERE DO YOU DISAGREE ON THAT?
SUMMERS: I THINK THERE IS NO QUESTION THAT THE DODD-FRANK MEASURES TO RAISE CAPITAL WERE VERY CONSTRUCTIVE AND WITHOUT THOSE MEASURES WE WOULD BE IN A MORE DANGEROUS SITUATION TODAY. HERE IS THE PUZZLE THAT OUR PAPER POINTS OUT. IF BANKS WERE MUCH BETTER CAPITALIZED AND MUCH LESS LEVERED THAN THEY USED TO BE, YOU WOULD EXPECT THAT YOU WOULD SEE THAT THEIR EQUITY WOULD BECOME MUCH LESS VOLATILE. YOU WOULD EXPECT THEIR BETA TO THE OVERALL STOCK MARKET WOULD GO DOWN. YOU WOULD EXPECT THAT THE YIELD ON THEIR DEBT AS IT GOT SAFER WOULD GO DOWN. YOU WOULD EXPECT THAT THEIR PREFERRED STOCK WHICH WAS BACKED BY A LARGER QUANTITY OF COMMON EQUITY WOULD HAVE A LOWER YIELD. AND WE EXPECTED THAT THAT IS WHAT WE WOULD FIND IN THE DATA. WHAT WE SAW LOOKING AT A VARIETY OF DIFFERENT SAMPLES OF BANKS WAS THAT THAT WASN'T THE PATTERN THAT PLAYED OUT. IF YOU LOOK AT MARKET MEASURES OF VOLATILITY THE VOLATILITY OF BANKS TODAY IS COMPARABLE TO SOME MEASURES A LITTLE MORE AND SOME MEASURES LESS THAN IT WAS PRIOR TO THE FINANCIAL CRISIS. SO IF YOU BELIEVE IN LOOKING TO MARKET EVIDENCE YOU DON'T SEE THE KIND OF DRAMATIC IMPROVEMENTS THAT I THINK YOU WOULD HAVE EXPECTED. WE THINK THAT'S IMPORTANT BECAUSE IF YOU LOOK IN 2008 THE REGULATORS AT BEAR STEARNS SAID THAT BEAR STEARNS WAS REALLY WELL CAPITALIZED A WEEK AFTER IT FAILED. SO WE THINK THAT IT'S A GOOD IDEA TO THINK VERY HARD ABOUT THE KIND OF SIGNALS THAT ARE BEING GIVEN IN MARKETS AND THAT'S WHY WE THINK THIS EVIDENCE IS RELEVANT FOR FUTURE DEBATES ABOUT BANK REGULATORY POLICY.
EVANS: HERE IS THE ONE QUESTION I WOULD HAVE IN ALL OF THIS WHICH IS GOING TO A LARGER DEBATE. TO WHAT EXTENT SHOULD WE TRUST THESE MARKET SIGNALS? IF WE GO BACK TO 2006 AND 2007 THE WEEK OF THE COLLAPSE PRACTICALLY THE EQUITY WAS TRADING AS IF THESE THINGS WERE MONEY MAKERS, GREAT INVESTMENTS AND HAD SOUND CAPITAL. IF WE COULDN'T TRUST THE MARKET SIGNALS THEN WHY SHOULD WE LOOK TO THE MARKET SIGNALS NOW TO TELL US THAT THEY ARE, IN FACT, WEAKER?
SUMMERS: I THINK IT IS AN IMPORTANT QUESTION. I CERTAINLY WOULDN'T BE ONE WHO WOULD FAVOR SOLE RELIANCE ON A MARKET SIGNAL. I THINK IT IS A LITTLE BIT DIFFERENT TO LOOK AT THE LEVEL OF A MARKET AT A POINT IN TIME AND ASSUME IT IS ACCURATE THAN IT IS TO LOOK AT A MEASURE OF VOLATILITY AND HOW MUCH A MARKET FLU FLUCTUATES AS INDICATION OF RISKINESS OF AN ENTERPRISE. IF YOU LOOK AT 2008 IT IS CERTAINLY TRUE THAT MARKETS DIDN'T SEE IMMEDIATELY WHAT WAS HAPPENING AT BEAR OR AT LEHMAN BUT IF YOU LOOKED AT THE DECLINES IN THE MARKET CAPITAL AS MEASURED IN MARKETS FOR EITHER BEAR OR LEHMAN PRIOR TO FAILURE IT WAS A MUCH MORE DRAMATIC MOVE THAN IN THE REGULATORY CAPITAL MEASURES. I THINK WE HAVE TO LOOK AT THESE IN ALL THE WAYS WE CAN. WHAT I THINK OUR PAPER POINTS OUT IS ONE BIG CHANGE FROM EARLY TO LATE FROM THEN TO NOW IS IN THE PRICE TO BOOK RATIO FOR MANY FINANCIAL INSTITUTIONS AND WHAT YOU MIGHT CALL THEIR FRANCHISE VALUE OR YOU MIGHT THINK OF AS THEIR CAPITAL IN THE DYNAMIC SENSE BECAUSE IT REFLECTS FUTURE PROFITABILITY. THAT HAS BEEN VERY, VERY SUBSTANTIALLY ERODED IN AT LEAST PROBABLY WE BELIEVE IN PART BECAUSE OF LOW INTEREST RATES AND IN PART BECAUSE OF DIFFERENT ECONOMIC ENVIRONMENT AND IN PART BECAUSE OF A WHOLE SET OF REGULATORY BURDENS THAT HAVE BEEN PUT ON BANKS. AND I THINK WE NEED TO RECOGNIZE THAT THOSE REGULATIONS HAVE BEEN WORKING IN AN OPPOSITE DIRECTION TO THE ONES THAT PROMOTE CAPITAL. IT ISN'T SIMPLY A MORE REGULATION OR LESS REGULATION DEBATE THAT ONE CAN HAVE.
GRIFFETH: HERE IS THE QUESTION I HAVE, THOUGH. YOU SEEM TO BE LOOKING AT EACH INDIVIDUAL BANK AND WHETHER THEY ARE SAFER TODAY THAN THEY WERE EIGHT YEARS AGO. I THINK THE QUESTION A LOT OF PEOPLE, THOUGH, HAVE TODAY IS IS THE BANKING SYSTEM SAFER THAN IT WAS EIGHT YEARS AGO? AS WE COMMEMORATE THE FALL OF LEHMAN EIGHT YEARS AGO TODAY, AND THE SYSTEMIC RISKS THAT IT POSED BECAUSE OF THE COUNTER PARTY RISK AND OTHER THINGS. HAS DODD-FRANK AND ALL OF THE OTHER REQUIREMENTS IMPOSED ON THE BANKING SYSTEM MADE IT SAFER? THAT'S A BIG QUESTION. WHAT DO YOU THINK ABOUT THAT?
SUMMERS: AGAIN, IT'S AN IMPORTANT QUESTION. WE CITE IN THE PAPER – THIS WAS NOT OUR WORK, BUT THE WORK OF OTHERS AT NEW YORK UNIVERSITY WHO ATTEMPT TO CONSTRUCT THE SYSTEMIC RISK MEASURE FROM MARKET INFORMATION AND THEY DO NOT SEE HUGE REDUCTIONS IN SYSTEMIC RISK. BUT AGAIN, IT'S ONE QUESTION TO ASK WHAT THE CHANGE IN RISK HAS BEEN AND IT IS ANOTHER QUESTION TO ASK WHETHER THE MEASURES TO PROMOTE INCREASED CAPITAL HAVE BEEN EFFICACIOUS. I THINK THEY HAVE BEEN EFFICACIOUS AND IN THEIR ABSENCE, I THINK WE WOULD BE LOOKING AT AN EVEN MORE DANGEROUS SITUATION TODAY. BUT I DON'T THINK THAT ONE CAN SIMPLY BE COMPLACENT AND ASSUME THAT WE'VE NOW CREATED SOME KIND OF SYSTEM WHERE BECAUSE WE MEASURE LESS LEVERAGE IN A REGULATORY CONTEXT, WE CAN ASSUME THAT THE INSTITUTIONS ARE FAR SAFER.
EVANS: I'M ALSO WONDERING WHETHER REGULATORS ARE LOOKING AT HOW THESE BANKS ARE TRADING TO MAKE POLICY DECISIONS. WHAT IS IMPLIED IN THIS ANALYSIS ABOUT WHETHER THERE NEEDS TO BE MORE OR LESS DONE IN TERMS OF THE REGULATION THAT WE HAVE ALREADY SEEN ON THE BANKS?
SUMMERS: AGAIN, AS I THINK I SAID, KELLY, I DON'T THINK YOU CAN REDUCE THIS TO A QUESTION OF MORE OR LESS. I THINK BEING BETTER CAPITALIZED, BEING RESOLVABLE, IMPORTANT THEMES IN REGULATION ARE, I THINK, VERY DESIRABLE. I THINK SOME PARTS OF THE REGULATORY EFFORT HAVE OPERATED TO REMOVE MANY SOURCES OF INCOME FOR BANKS AND THAT HAS HAD THE PERVERSE EFFECT THAT WHEN YOU HAVE REDUCED FUTURE INCOME FLOW, YOUR SAFETY DECLINES.
EVANS: AND THAT'S WHAT WE ARE CERTAINLY SEEING NOW.
SUMMERS: AND SO AGAIN, I THINK YOU HAVE TO LOOK AT THE CONTENT OF REGULATION AND NOT JUST SIMPLY LOOK AT THE QUANTITY OF REGULATION. AND I THINK THAT'S A BROAD PRINCIPLE OF BEING THOUGHTFUL IN POLICY THAT IS SOMETIMES MISSED IN POLITICAL DEBATES.
GRIFFETH: GOT IT. MR. SECRETARY, ALWAYS GOOD TO SEE YOU. THANK YOU FOR JOINING US TODAY.
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