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Treasury's
Regulatory Blueprint
Brian
Trumbore
President/Editor, StocksandNews.com
On March 31, 2008, Treasury Secretary
Henry Paulson, Jr. unveiled what has been called the
most sweeping revamp of the regulations guiding our
financial system since the 1930s. From his accompanying
report:
--The
current U.S. financial regulatory framework includes:
Five
federal depository institution regulators in addition
to state- based supervision.
One
federal securities regulator and one federal futures
regulator. We also have additional state based supervision
of securities firms as well as self-regulatory organizations
with broad regulatory powers.
Insurance
regulation is almost wholly state-based, with 50+
regulators. This structure raises a number of issues
with an international dimension that can be inefficient
and costly.
SUMMARY
OF RECOMMENDATIONS
SHORT-TERM
Liquidity
Provisioning by the Federal Reserve
--Treasury
recommends specific enhancements to the process of
expanding access to Federal Reserve lending channels.
--First,
future lending to non-depository institutions should
be calibrated and transparent.
--Second,
the Federal Reserve should have access to sufficient
information on non-depository institutions with access
to Federal Reserve loans. This could include on-site
examinations or other means as determined by the Federal
Reserve. The most important information relates to
funding and liquidity.
--This
will provide framework for oversight of non-depository
institutions with temporary access to Fed lending
while recognizing the differences between banks and
non-banks.
Mortgage
Origination
--The
high levels of delinquencies, defaults, and foreclosures
among subprime borrowers in 2007 and 2008 have highlighted
gaps in oversight for mortgage origination.
--Treasury's
recommendation, which sets consistent national standards
for all types of mortgage originators and improves
enforcement at the federal and state levels, has three
components.
1.
Treasury recommends the creation of a new federal
commission led by a Presidential appointee, the Mortgage
Origination Commission (MOC), to evaluate, rate, and
report on the adequacy of each state's system for
licensing and regulatory participants in the mortgage
origination process. Federal legislation should establish
(or provide authority for the MOC to develop) uniform
minimum qualifications for state mortgage market participant
licensing systems.
2.
Treasury recommends that the Federal Reserve continue
to write regulations implementing national mortgage
lending laws.
3.
Treasury recommends clarification and enhancement
of the Federal enforcement authority over these laws.
INTERMEDIATE-TERM
State
Bank Oversight
--Treasury
recommends the rationalization of direct federal supervision
of state-chartered banks. Treasury recommends a study
be conducted to streamline the regulation of state-chartered
banks with a federal guarantee by either the Federal
Reserve or the FDIC.
--Rationalization
in this area would result in a more efficient and
less duplicative regulatory system.
Insurance
--Treasury
recommends the establishment of a federal insurance
regulatory structure to provide for the creation of
an Optional Federal Charter. This structure is similar
to the current dual- chartering system for banking.
An Office of National Insurance within Treasury should
oversee this federal regulatory structure.
--Treasury
also recommends that, as an intermediate step, Congress
establish a federal Office of Insurance Oversight
within Treasury to establish a federal presence in
insurance for international and regulatory issues.
--These
reforms would provide more effective, efficient, and
consistent regulation for national insurers and would
enhance product choice and innovation.
Securities
and Futures
--Treasury
recognizes the convergence of the securities and futures
markets and the need for reform and unified oversight
and regulation of the futures and securities industries.
--Treasury
recommends a merger of the SEC and CFTC.
--Treasury
recommends the following changes to reform the SEC's
process for the securities market to prepare for the
merger:
1.
the adoption of core principles for exchanges and
clearing agencies,
2. an expedited SRO rule approval process,
3. general exemption under Investment Company Act
for already actively trading exempted products, such
as exchange traded funds, to improve the new product
approval process consistent with SEC investor protection
standards.
4. new Congressional legislation to expand the Investment
Company Act to permit a new global investment company.
--Treasury
also recommends statutory changes to harmonize the
regulation and oversight of broker-dealers and investment
advisers offering similar services to retail investors.
Treasury also recommends that investment advisors
be subject to a self- regulatory regime similar to
that of broker-dealers.
LONG-TERM
OPTIMAL REGULATORY STRUCTURE RECOMMENDATION
Overview
of the Optimal Model
--The
current system of functional regulation, which maintains
separate regulatory agencies across segregated functional
lines of banking, insurance, securities, and futures,
is largely incompatible with today's financial markets.
Functional regulation has several fundamental problems,
including the lack of a single regulator to monitor
systemic risk.
--Treasury
is seeking an objectives-based approach designed to
address particular market failures by focusing on
three key goals:
market
stability regulation to address overall conditions
of financial market stability, prudential financial
regulation to address issues of limited market discipline
caused by government guarantees, and business conduct
regulation (linked to consumer protection regulation)
to address standards for business practices.
--Three
distinct regulators would focus exclusively on financial
institutions: a market stability regulator (i.e.,
the Federal Reserve), a new prudential financial regulator
(roles of the OCC, OTS and NCUA), and a new business
conduct regulator (most roles of the CFTC and SEC,
and some roles of bank regulators).
Market
Stability Regulator
--The
Federal Reserve would have the responsibility and
authority to gather appropriate information, disclose
information, collaborate with the other regulators
on rule writing, and take corrective actions when
necessary to ensure overall financial market stability.
To fulfill its responsibilities to gather information,
the Fed would have authority to join in examinations
with the prudential and business conduct regulators.
--This
new role will replace the Fed's more limited, traditional
role as the supervisor of financial holding companies,
bank holding companies, and certain state-chartered
banks.
--The
Fed would have the ability to monitor risks across
the financial system.
Prudential
Regulator
--A
single prudential regulator focusing on safety and
soundness of firms with federal guarantees, similar
to the OCC, but with appropriate authority to deal
with affiliate relationship issues.
--Prudential
regulation in this context would be applied to individual
firms, and it would operate like the current regulation
of insured depository institutions, with capital adequacy
requirements, investment limits, activity limits,
and direct on-site risk management supervision.
--The
prudential regulator would oversee firms with explicit
government guarantees.
Business
Conduct Regulator
--A
new business conduct regulator would monitor business
conduct regulation across all types of financial firms.
Business conduct regulation in this context includes
key aspects of consumer protection such as rule writing
for disclosures, business practices, and chartering
/ licensing of certain types of financial firms.
--The
new business conduct regulator subsumes most roles
of he SEC/CFTC and authority over rules such as mortgage
disclosure.
--This
framework would eliminate gaps in oversight and provide
effective consumer and investor protection.
[Source:
ustreas.gov]
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Wall
Street History returns next week.
Brian
Trumbore
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