Financial Regulatory Reform: A New Foundation, Rebuilding Financial Supervision and Regulation outlines five major objectives that the Department of the Treasury is seeking to implement in the wake of the financial crisis.

This report has been released by the aforementioned department this week.

The report does not let financial firms escape blame. It lambasts the “sophisticated financial firms” saying that their risk management systems did not keep pace with the complexity of new financial products. The lack of transparency and standards in markets for securitised loans helped to weaken underwriting standards. Market discipline broke down as investors relied excessively on credit rating agencies, the report added. Compensation practices throughout the financial services industry rewarded short-term profits at the expense of long-term value.

The purpose of the report’s publication is to restore confidence in the integrity of the financial system and has therefore proposed reforms to meet five key objectives:

 1. Promote robust supervision and regulation of financial firms

The report proposes:

• A new Financial Services Oversight Council of financial regulators to identify emerging systemic risks and improve interagency co-operation.
• New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.
• Stronger capital and other prudential standards for all financial firms and even higher standards for large, interconnected firms.
• A new National Bank Supervisor to supervise all federally chartered banks.
• Elimination of the federal thrift charter and other loopholes that allowed some depository institutions to avoid bank holding company regulation by the Federal Reserve.
• The registration of advisers of hedge funds and other private pools of capital with the SEC.

 2. Establish comprehensive supervision of financial markets

The report proposes:

• Enhanced regulation of securitisation markets, including new requirements for market transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitised loans.
• Comprehensive regulation of all over-the-counter derivatives.
• New authority for the Federal Reserve to oversee payment, clearing and settlement systems.

 3. Protect consumers and investors from financial abuse

The report proposes:

• A new Consumer Financial Protection Agency to protect consumers across the financial sector from unfair, deceptive and abusive practices.
• Stronger regulations to improve the transparency, fairness and appropriateness of consumer and investor products and services.
• A level playing field and higher standards for providers of consumer financial products and services, whether or not they are part of a bank.

 4. Provide the government with the tools it needs to manage financial crises

The report proposes:

• A new regime to resolve nonbank financial institutions whose failure could have serious systemic effects.
• Revisions to the Federal Reserve’s emergency lending authority to improve accountability.

 5. Raise international regulatory standards and improve international co-operation

The report proposes:

• International reforms to support our efforts at home, including strengthening the capital framework; improving oversight of global financial markets; co-ordinating supervision of internationally active firms; and enhancing crisis management tools.

Tagged with: 2009, press, regulations