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June 19, 09

NEWS / Obama Envisions Sweeping Reform of Financial Regulation Institutions, products that played roles in

By Andrzej Zwaniecki
Staff Writer

Washington — President Obama proposes a comprehensive overhaul of the U.S. financial regulatory system that is designed to address the structural weaknesses revealed by the recent financial crisis and to limit the potential for similar crises in the future.

At the White House June 17, Obama unveiled details of the plan, which would reshape the ways financial institutions do business in the United States and the way government supervises that business. The plan was designed by the administration after consultation with industry representatives, consumer advocates, congressional leaders and government regulators.

“I’m convinced that by setting out clear rules of the road and ensuring transparency and fair dealings, we will actually promote a more vibrant market,” Obama said.

The proposal calls for stronger oversight of opaque financial instruments and the financial institutions that designed and sold them. Many economists say that the excessive risks those institutions took exacerbated the financial crisis. By announcing details of the plan, the president opens the way for formal discussion with lawmakers on the final shape of reforms.

The president’s plan would allow the Federal Reserve — the U.S. central bank — to regulate bank holding companies and other large and interconnected financial companies whose failure could pose risks to the U.S. economy. The plan would raise capital and liquidity requirements for companies that in the past were viewed as “too big to fail” and establish a mechanism for their orderly resolution when they do in fact fail. The administration believes that these measures will go a long way to ensure the stability of the financial system.

The proposal also aims to address securitization, or the issuance of securities backed by different classes of assets, a trend that accelerated in the years preceding the current crisis and acquired notoriety when the market for mortgage-backed securities collapsed. The proposal would impose strict reporting requirements on the originators or brokers of asset-backed securities and require them to retain part of the risk associated with the underlying loans. It also would regulate, for the first time, complex financial instruments such as credit default swaps, which are poorly understood and traded mostly outside the view of regulators.

In addition, the proposal calls for creation of a new agency designed to protect consumer interests across a range of financial products that includes credit cards and mortgages.
Doug Rediker of the New America Foundation, a policy research group, said the proposal will not prevent financial crises in the future because they will be of a nature that cannot be anticipated. But the plan tries to align incentives and risks in a way that would make it more difficult for financiers to exploit the financial system unduly, at least in the short term.

Obama presented the plan as an attempt to modernize U.S. financial regulation — the major tenets of which were established during the Great Depression of the 1930s — in a way that would make it capable of dealing with the sophistication and the global scope of a 21st- century economy. U.S. Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers, in a June 15 commentary published by the Washington Post, write, “Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk.”

The new White House plan, however, refrains from consolidating and simplifying the overly complex structure of federal regulatory authorities, a reorganization that only a few weeks ago seemed to be one of the administration’s priorities. Instead, the plan would establish a council of regulators, which in addition to providing a check on the Federal Reserve’s expanded authority, would “fill gaps in regulation, facilitate coordination of policy and resolution of disputes, and identify emerging risks in firms and market activities,” according to a White House fact sheet.

The president said he also will ask Congress to merge two agencies responsible for bank supervision.

Rediker said the administration is taking a realistic view of what is politically possible, given that Congress, not the administration, will write the final reform legislation.

Initial plans for a deeper reform of the regulatory structure have encountered opposition from powerful heads of key congressional committees that soon will hold hearings on the administration’s proposal. In a June 16 television interview, the president said: “We want to get this thing passed, and, you know, we think that speed is important. We want to do it right. We want to do it carefully. But we don’t want to tilt at windmills.” Obama wants Congress to get legislation ready for his signature before the end of the year.

In a globalized economy, a new regulatory regime will have little effect if international regulatory standards are not aligned around similar goals, officials said. The Obama administration intends to lead efforts to improve financial regulation and supervision around the world. Its proposal calls on an international group of central banks to come up with measures to limit overreliance of the international financial system on debt and to raise capital requirements to offset riskier assets.

The Obama plan is consistent with the ideas that came out of two summits of the Group of 20 (G20) large economies. However, it will be difficult to know whether U.S., European Union and other economies are heading in the same direction on regulatory reform until all the details are ironed out, Rediker said.

It will be important, he said, to ensure that financial institutions with an international reach do not shop among national regulatory regimes to avoid oversight or strict rules. “Otherwise, the next bubble is likely to take place in the area of cross-border financial flows,” Rediker said.

A transcript of the president’s remarks is available on America.gov. A Treasury white paper on financial regulatory reform (PDF, 2 MB) is available on the Treasury site. Fact sheets on supervision of financial firms (PDF, 100 KB), on strengthening core markets (PDF, 86 KB), on consumer protection (PDF, 88 KB), on giving the government tools to manage failing financial institutions (PDF, 80 KB), and on improving international regulatory standards (PDF, 77 KB) are available from financialstability.gov.



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