The American government last week announced its proposals for a regulatory overhaul in the financial sector. Ben Bernanke, the chairman of Americas Federal Reserve, also urged a macroprudential and comprehensive approach to oversee interconnected risks.
While sweeping across multiple fronts, the June 17 plans which were largely anticipated by Treasury Secretary Geithners blueprint on March 25 highlight several critical changes.
First, the Federal Reserve would get enhanced authority to oversee firms and their subsidiaries, to protect against systemic risk. That power would extend beyond banks to firms, such as retailers or conglomerates, with substantial financial operations.
Second, the Federal Deposit Insurance Corporation would gain responsibilities for winding down failing institutions, potentially replacing traditional bankruptcy courts.
Third, a brand new watchdog would be established as a consumer regulator, to promote transparency for mortgages, credit cards and auto loans.
However, an expected consolidation of regulators was missing from the proposals. Just one agency, the Office of Thrift Supervision, will be sacrificed, which was widely predicted. Surprisingly, the Securities and Exchange Commission and the Commodities Futures Trading Commission will survive in their current forms, as a concession to the political challenges of trying to merge these long-time turf rivals.
Also absent is a push to streamline the insurance industry, which is regulated on a state-by-state basis. Little has been done to curtail the influence of the credit rating agencies a major culprit of the meltdown. Hedge funds and private equity continue to enjoy looser rules.
Most controversial is the beefed-up status of the central bank as an over-arching regulator. Critics argue that new, unprecedented powers might compromise the Federal Reserves paramount function of monetary independence. They also point out that under Alan Greenspan, its former chairman, the Federal Reserve helped exacerbate the housing bubble and resisted regulating derivatives markets, instead praising a lighter touch.
The banking industry warns that increased regulation may stifle innovation, while higher capital reserves erode profitability and add costs.