Proposal to overhaul US regulation of financial markets

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01 Apr 2008

US Secretary of the Treasury Henry M Paulson Jr has released a Blueprint for a Modernized Financial Regulatory Structure that proposes a series of 'short-term' and 'intermediate-term' reforms of the structure for regulating financial institutions and markets in the United States.

The changes are of a magnitude not seen since the current regulatory system was set up in response to the 1929 stock market crash and subsequent Great Depression.

  • The short-term recommendations focus on taking action now to improve regulatory coordination and oversight in the wake of recent events in the credit and mortgage markets.
  • The intermediate recommendations focus on eliminating some of the duplication of the US regulatory system and try to modernise the regulatory structure applicable to certain sectors in the financial services industry (banking, insurance, securities, and futures) within the current framework.
The report also includes a conceptual model for an 'optimal' regulatory framework. The optimal structure envisions the Federal Reserve as the 'market stability regulator', a new 'prudential financial regulator' for banks and savings institutions, and a new business conduct and corporate finance regulator. The latter would assume the SEC's current responsibilities over corporate disclosures, corporate governance, and accounting oversight.

Among the short-term recommendations:

  • President's Working Group on Financial Markets (PWG). This existing inter-agency coordinating body should be expanded, and its role as policy-maker should be enhanced.
  • Mortgage origination. Create a six-member federal Mortgage Origination Commission (MOC) that would establish uniform minimum licensing qualification standards for state mortgage market participants. The MOC would also evaluate, rate, and report on the adequacy of each state's system for licensing and regulation of participants in the mortgage origination process.
  • Liquidity provisioning by the Federal Reserve. First, the current temporary liquidity provisioning process during those rare circumstances when market stability is threatened should be enhanced to ensure that: the process is calibrated and transparent; appropriate conditions are attached to lending; and information flows to the Federal Reserve through on-site examination or other means as determined by the Federal Reserve are adequate. Key to this information flow is a focus on liquidity and funding issues.
Among the intermediate-term recommendations:
  • Federal thrift institutions. Federally chartered savings and mortgage institutions should become national banks. The Office of Thrift Supervision would be closed, and its operations assumed by the Office of the Comptroller of the Currency (the federal bank regulator). This transition would take place in two years.
  • Federal banking supervision. There should be direct federal supervision of state-chartered banks. A number of proposals are set out in this regard.
  • Payment and settlement systems oversight. There should be direct federal oversight of all systems used to transfer funds and financial instruments between financial institutions and between financial institutions and their customers.
  • Insurance. A federal system for chartering, licensing, regulating, and supervising insurers should be created. Insurers, reinsurers, agents, and broers would elect to be regulated under the federal system or to continue under the current state-based regulation. A new Office of Insurance Oversight would be established within the Treasury Department to take the lead role in federal insurance regulation.
  • Futures and securities. The Commodity Futures Trading Commission (CFTC, which regulates futures and options) and the Securities and Exchange Commission (SEC, which regulates securities, mutual funds, stock markets, and broker/dealers) should be merged to provide unified oversight and regulation of the futures and securities industries.

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