Reg Rage: US Treasury to shake up finance rules
A plan to create a new system of financial regulation in the US has just been announced. Bankers are already pleading for some of the proposals to be modified. Writer Michael Imeson
What is it?
President Barack Obama's administration has unveiled a radical set of proposals to reform financial regulation in the US. Guess what? There's a lot about it that bankers don't like.
Who dreamed it up?
The US Department of the Treasury. Treasury secretary Timothy Geithner outlined his Framework for Regulatory Reform in March. More details were fleshed out in a joint presentation by President Obama and Mr Geithner last month.
What are the main provisions?
There are four broad measures aiming to:
- Address systemic risk, so that regulation not only tries to prevent the insolvency of individual institutions, but also ensures the stability of the entire financial system.
- Improve protection for consumers and investors.
- Eliminate gaps in the regulatory structure.
- Foster international co-ordination so that other countries' rules "are consistent with the high standards we will be implementing in the US".
What's in the small print?
On addressing systemic risk, for example, there will be a single independent regulator with responsibility over systemically important firms and critical payment and settlement systems; higher standards on capital and risk management for systemically important firms; a comprehensive framework of oversight, protection and disclosure for the over-the-counter derivatives market; and a stronger 'resolution authority' to prevent the 'disorderly liquidation' of non-bank financial institutions that are not already subject to the authority of the Federal Deposit Insurance Commission (FDIC).
What does the industry say?
The American Bankers Association (ABA) is not entirely happy. Although chief executive Edward Yingling admits "there is much to like in the Treasury's proposal" - such as the mechanism to resolve troubled non-bank firms that pose systemic risk, and closing gaps in the regulatory system - "several specific items raise serious concerns and merit careful deliberation".
In a letter to Mr Geithner, Mr Yingling says he is against the administration's idea of creating a single prudential regulatory agency for banks, in effect, merging the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the bank regulatory functions of the FDIC and the Federal Reserve Board. "The ABA is adamantly opposed to this concept because we believe it would, as a practical matter, be the end of a true dual banking system. Such a federal regulatory agency would undoubtedly have a strong bias towards federally regulated institutions. Therefore, state regulated banks would be at a disadvantage."
Mr Yingling is also against the proposal to create a consumer financial protection agency, to which he is opposed because it would add to an already over-complex regulatory structure.
How much will it cost?
Think of a figure and add more noughts. Seriously, though, the ABA is concerned that the bill for the proposed mechanism to save non-banks in trouble would be dumped on banks.
What do the legislators say?
Mr Geithner says: "To address these failures will require comprehensive reform - not modest repairs at the margin, but new rules of the road."
The law of unintended consequences
It is likely the FDIC will be made the resolution authority for non-bank firms, which could confuse the public. Bankers believe the FDIC should be left to its main purpose - to protect bank deposits. Extending its remit to rescue insurers and other non-banks might lead the public to believe that non-bank savings and investments would also be protected, which they would not.
Could we live without it?
No. The US system of financial regulation needs to be overhauled. But some more controversial reforms must be ditched if the industry is to support the wider package.
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