Today, the Obama administration unveiled its proposal for financial regulatory reform. The five policy objectives outlined in the proposal include: 1) promoting supervision and regulation of financial firms, 2) establishing supervision and regulation of financial markets, 3) increasing protections for financial consumers, 4) improving tools for managing financial crises, and 5) establishing international regulatory standards and stepping-up international cooperation. The plan’s major proposals are discussed below:
1. Supervision and Regulation of Financial Firms
The administration proposes the creation of a new Financial Services Oversight Council, which would identify emerging systemic risks and push for interagency cooperation. The plan would also give the Federal Reserve broad supervisory powers over businesses that it believes could pose a threat to financial stability. Further, administrative changes include: creating a new national Bank Supervisor to supervise all federal chartered banks, dismantling the federal thrift charter and certain loopholes that allow some depository institutions to avoid bank holding company regulations, and requiring advisors of all hedge funds to register with the SEC. The plan also suggests more stringent capital and prudential standards for all financial firms, especially larger, interrelated firms.
2. Regulation of Financial Markets
The administration recommends enhanced regulation of securitization markets, including new requirements for market transparency, tighter regulation of credit rating agencies, and a mandate that issuers and originators retain a financial interest in securitized loans. The plan also proposes comprehensive regulation of all OTC derivatives. The administration again pushes to expand the authority of the Federal Reserve, suggesting the Fed oversee payment, clearing, and settlement systems for the financial market.
3. Consumers and Investor Protections
The administration proposal creates a new Consumer Financial Protection Agency, charged with overseeing consumer protection in credit, savings, and payments markets. In addition, the plan calls for tighter regulations for all providers of consumer financial products and services, including those provided separately from banking.
4. Tools for Managing Crises
The administration requests revisions to the Federal Reserve's emergency lending authority to manage and/or prevent crises in the financial sector, including malfunctions in those non-bank financial institutions whose collapse could cause systemic consequences.
5. International Regulatory Standards and International Cooperation
Finally, the administration proposes that international regulatory standards be tightened to support domestic efforts and oversee global financial markets, while coordinating supervision of internationally active firms.
In sum, the administration is proposing a significant restructuring of the regulatory system, creating several new agencies or agency powers including: a Financial Services Oversight Council, the Consumer Financial Protection Agency, the National Bank Supervisor, the Office of National Insurance within Treasury to achieve national coordination in the insurance sector, and increasing the powers of the Federal Reserve. This restructuring is likely to spur a heated debate in Congress, centering on the benefits and detriments of governmental regulation of the financial sector.
(Special thanks to Suleen Lee and Kathleen Stetsko for their contributions to this post.)
