By Jason Simpkins
Associate Editor
U.S. Treasury Secretary Henry Paulson officially unveiled his blueprint for the most significant regulatory overhaul of the nation’s financial system since the Great Depression yesterday (Monday).
The plan would expand upon the powers of the Federal Reserve and effectively streamline several government agencies.
“Our current regulatory structure was not built to address the modern financial system with its diversity of market participants, innovation, complexity of financial instruments, convergence of financial intermediaries and trading platforms, global integration and interconnectedness among financial institutions, investors and markets,” Paulson said.
Currently, the U.S. Federal Reserve is responsible for setting monetary policy and overseeing certain banks and all bank holding companies. But under Paulson’s new plan, the Federal Reserve would serve as a moderator for the financial markets, intervening during tumultuous periods to restore stability.
The Fed took precisely that action last month when it orchestrated JPMorgan Chase & Co.’s (JPM) buyout of The Bear Stearns Cos. Inc. (BSC). However, Paulson suggests a more explicit expanding of the Fed’s authority going forward.
“Given its traditional central bank role of promoting overall macroeconomic stability, the Federal Reserve is the natural choice for the important task of market stability regulator,” Paulson said.
“To do its job as the market stability regulator,” Paulson added, “the Fed would have to be able to evaluate the capital, liquidity and margin practices across the financial system and their potential impact on overall financial stability. The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability.”
Another feature of the plan is the proposed merger of the Securities and Exchange Commission (SEC) with the Commodity Futures and Trading Commission (CFTC). The combined entity would act to “monitor business conduct regulation across all types of financial firms.”
Paulson defined “business conduct regulation” as disclosures, business practices, chartering and licensing of certain types of financial firms, and rigorous enforcement programs.
Additionally the Office of Thrift Supervision (OTS) would be folded into the Office of Comptroller of the Currency (OCC).
“The thrift charter is no longer necessary to ensure sufficient residential mortgage loans availability for U.S. consumers,” Paulson said. “With the elimination of the federal thrift charter, the OTS would be closed and its operations would be assumed by the OCC.”
Paulson’s 218-page “Blueprint for Regulatory Reform” was commissioned last June amid growing concern on Wall Street that U.S. regulations were keeping financial firms at a disadvantage to their foreign counterparts.
Two months later, when financial markets froze up and the housing market crashed, the investigation into U.S. regulatory practice shifted gears.
While Paulson clearly sees the necessity for reform, he also acknowledged that such sweeping changes could take years and should certainly be put off until markets emerged from their current turmoil.
“With few exceptions, the recommendations in this blueprint should not and will not be implemented until after the present market difficulties are past,” he said.
Many analysts are skeptical that the changes will come even within the next few years however, as previous attempts at reform have failed. We are also in an election year, which could further derail the process.
“Expect to see news stories and renewed questions about what the future will hold,” John Reich, director of the Office of Thrift Supervision, wrote in a letter to employees on March 28. “The 20th anniversary of the OTS is next year. We can all expect – despite predictions over the years to the contrary — to be celebrating it.”
In his letter, which was distributed to various media outlets over the weekend, Reich encouraged employees to “take note of the fanfare, then look back,” as similar plans throughout history failed to come to fruition.
He also pointed out that congressional hearings and debate could will likely stretch well into next year, when a new Congress and new president “may well have their own priorities and agendas.”
News and Related Story Links:
- Washington Post: Secretary Paulson Remarks on Financial Markets
- MarketWatch: Paulson defends regulatory blueprint overhaul