Administration Releases Regulatory Reform Proposal
March 26, 2009
On Mar. 26, 2009, United States Treasury Secretary Timothy Geithner appeared before the House Financial Services Committee to address overhauling financial regulatory systems. As a result, the Treasury department has released a set of guidelines and model legislation for regulating systemic risks in the financial system. These issues, Treasury insists, require more cooperation globally, and they will be at the center of the agenda at the upcoming Leaders’ Summit of the G-20 in London on April 2.
Geithner’s testimony concentrated on the substance of the reform agenda, rather than the complex and sensitive questions of which regulatory bodies should be responsible for the reforms. Further details related to these reforms will be released in the coming days and weeks.
In opening comments Geithner stated, “To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game. The new rules must be simpler and more effectively enforced and produce a more stable system, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.” The comprehensive framework for regulatory reform will cover four broad areas:
- Systemic Risk;
- Consumer and Investor Protection;
- Eliminating Gaps In Our Regulatory Structure; and
- International Coordination;
On Feb. 25, after meeting with the banking and financial services leadership from Congress, President Barack Obama directed his economic team to develop recommendations for financial regulatory reform and to begin the process of working with the Congress on new legislation. Since then, the Treasury department has worked with the President’s Working Group on Financial Markets (PWG) to develop a comprehensive plan of reform.
The following is an outline of the reform principles presented by the administration:
1. Create a single entity to regulate systemic risks.
a. Give the government authority to put a firm into conservatorship or receivership.
b. Empower Treasury and Federal Deposit Insurance Corporation along with the Federal Reserve to make the decision to seize a company, with recommendations from the Fed and other regulators.
c. Allow the government to make loans, cash infusions and purchase obligations or assets and liabilities.
d. Allow the conservator or receiver to sell, transfer or renegotiate the assets or liabilities of the institution in question.
e. Establish and enforce substantially more conservative capital requirements for institutions that pose potential risk to the stability of the financial system.
2. Implement strong consumer and investor protections.
a. Implement stronger standards for openness, transparency and plain, common sense language throughout the financial system.
b. Execute strong federal regulation and transparency over all financial products including money market funds, hedge funds and other investment vehicles like credit default swaps and over-the-counter derivatives.
3. Revamp the U.S. regulatory structure.
a. Regulate financial products and institutions for the economic function they provide and the risks they present, not the legal form they take.
b. Federal regulatory agencies may be consolidated and revamped to provide maximum coordination and transparency.
c. The administration desires to end the practice of allowing banks to change their regulating body simply by changing their charter.
4. Allow strong international coordination.
a. Recognize that risk does not respect national borders.
b. As such, the administration would like to “prevent national competition to reduce standards and encourage a race to higher standards,” meaning, they desire to prevent tax havens and money-laundering.
c. High standards at home need to be complemented by strong international standards and enforced more evenly and fairly.
FEI has formed a working group to increase awareness of Financial Regulation Reform proposals and provide a forum for information sharing and commenting on policy proposals as they move through the legislative process. If you’re interested in learning more, please contact Cady North, manager, Government Affairs, at FEI at firstname.lastname@example.org or 202-626-6803.
Prepared March 26, 2009 by Cady North, manager, Government Affairs, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.