[JURIST] US President Barack Obama [official website] proposed a broad series of financial regulatory reforms [white paper, PDF; statement] Wednesday intended to reestablish stability and confidence in the US financial system. The plan calls for the expansion of Federal Reserve [official website] regulatory powers to cover both bank and non-bank financial institutions, for the Reserve to oversee payment, clearance, and settlement systems of financial markets, and for increased accountability measures for when the Reserve exercises its emergency lending powers. The plan also calls for the creation of a Financial Services Oversight Council of financial regulators to coordinate regulatory agency efforts, as well as the creation of a National Bank Supervisor to oversee nationally-chartered banks. It calls for the creation of a Consumer Financial Protection Agency to protect consumers against unfair or deceptive practices by financial institutions, and finally the standardization of international financial regulations. Justifying the need for such drastic changes, Obama said that government regulators had to take a broad approach to prevent the build up of the kind of accumulated risk that lead to the current economic downturn:
While this crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system. Gaps and weaknesses in the supervision and regulation of financial firms presented challenges to our governments ability to monitor, prevent, or address risks as they built up in the system. No regulator saw its job as protecting the economy and financial system as a whole.Many of the proposed changes would have to be approved by Congress before taking effect, and initial House of Representatives hearings on the changes are planned for next week [WP report].
Existing approaches to bank holding company regulation focused on protecting the subsidiary bank, not on comprehensive regulation of the whole firm. Investment banks were permitted to opt for a different regime under a different regulator, and in doing so, escaped adequate constraints on leverage. Other firms, such as AIG, owned insured depositories, but escaped the strictures of serious holding company regulation because the depositories that they owned were technically not banks under relevant law.
We must act now to restore confidence in the integrity of our financial system. The lasting economic damage to ordinary families and businesses is a constant reminder of the urgent need to act to reform our financial regulatory system and put our economy on track to a sustainable recovery. We must build a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.
In March, US Treasury Secretary Timothy Geithner [official profile] indicated that the Department of the Treasury [official website] would propose stronger rules [prepared remarks; JURIST report] in response to the current economic crisis, and called for both the Reserve and Treasury to be given broader powers. In February, Geithner had emphasized increasing restrictions on financial institutions [press release, JURIST report] receiving government assistance.