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AmericasMay 4 2008

US banks reeling from regulatory review

The proposed radical shake-up of financial regulation in the US has rattled the banking industry, writes Michael Imeson.
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What is it?

The US Treasury Department is proposing an overhaul of the US financial regulation system. The blueprint for a Modernised Financial Regulatory Structure, released on March 31, is intended to strengthen consumer protection, improve market stability and enhance financial innovation. Banks have voiced strong opposition – especially peeved at measures that threaten thrift institutions and the system of state-chartered banks.

Who dreamed it up?

Treasury secretary Henry Paulson.

What are the main provisions?

The short-term recommendations include improvements to regulatory oversight and co-ordination, such as creating a new federal Mortgage Origination Commission and clarifying the Federal Reserve’s liquidity provisioning. The main medium-term recommendations focus on:

  • Eliminating duplication in the regulatory system, such as getting rid of the federal thrift charter (federal authorisation for thrift institutions) and replacing it with the federal bank charter; closing the Office of Thrift Supervision and transferring its operations to the Office of the Comptroller of the Currency; and merging the Securities and Exchange Commission with the Commodities Futures Trading Commission.
  • Modernising what remains, such as creating an optional federal insurance charter and regulatory structure to supplement the system of state insurance charters and regulation.

The long-term plan is to scrap the system of separate regulators for banking, insurance, securities and futures and replace them with an entirely new cross-functional regulatory structure. This would consist of a market stability regulator, a prudential regulator and a business conduct regulator with a focus on consumer protection.

What’s in the small print?

 

Deep inside the 212-page blueprint is a recommendation for every bank to have a federal charter. State banking charters would become redundant because few banks would need both.

What does the industry say?

The American Bankers Association (ABA) is worried. Its chief executive, Edward Yingling, says banks are “disappointed that in several important respects the proposed blueprint comes up short. In particular, dismantling the thrift charter and crippling state banking charters will weaken banking in America. We firmly oppose the recommendation to do away with the thrift charter, which makes housing finance a first responsibility.”

Mr Yingling warns: “Almost 70% of banks today hold state charters, all of which are jeopardised by the provisions of the blueprint.” But it is not all doom and gloom. The ABA “congratulates” the Treasury on its proposal for a federal regulatory structure for insurance: “other elements of the Treasury proposal make good sense and deserve support”.

How much will it cost?

 

The ABA’s regulation expert, Wayne Abernathy, says: “The changes are so sweeping I wouldn’t trust any cost-benefit analysis – it is tantamount to tearing down a house and rebuilding it while continuing to occupy it.”

What do the law-makers say?

Secretary Paulson says: “We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions and one that will better protect investors and consumers.”

The law of unintended consequences

Tearing down the regulatory structure will disrupt long-standing relationships between regulators and the regulated and weaken prudential supervision.

Could we live without it?

Yes, although some of the short-term proposals are useful.

Rating: 4 for some proposals but 2 or 1 for others

Rating scale:

5 = Essential4 = Useful 3 = Neutral2 = Unnecessary 1 = Damaging.

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Read more about:  Financial Regulation , Regulations , Americas , US