President Barack Obama revealed Wednesday a series of initiatives that he described as “the most sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.†He outlined the administration’s audacious plan to protect consumers, investors and homebuyers while creating a new structure that would prevent future financial meltdowns.
“A culture of irresponsibility took root from Wall Street to Washington to Main Street. With the reforms we are proposing today, we seek to put in place rules that will allow our markets to promote innovation while discouraging abuse. We seek to create a framework in which markets can function freely and fairly, without the fragility in which normal business cycles suddenly bring the risk of financial collapse; we want a system that works for businesses and consumers,†Obama asserted in remarks delivered at press conference in the White House framing the program under his “New Foundation†theme.
The planks of the reform call for:
–Creation of the Consumer Financial Protection Agency, a watchdog agency that would regulate consumer lending as well as force lenders to clearly explain loan agreements and offer more “plain vanilla†financial products.
–Expansion of the Federal Reserve’s oversight of all large, interconnected institutions whose failure could jeopardize the financial system. Those firms would be required to meet higher capital and liquidity requirements, and if they are found to pose a risk, the Fed would be authorized to intervene.
–Development of a Financial Service Oversight Council
to help fill in the gaps in regulation and identify emerging systemic risks. Replacing the President’s Working Group on Financial Markets, it would be chaired by Treasury and comprised of the heads of other financial regulatory agencies, including the newly-created post of National Bank Supervisor.–Comprehensive regulation of markets for derivatives, including asset-backed securities and credit default swaps — investment vehicles that were largely cited as one of the leading causes of last year’s implosion of the financial markets.
The President’s financial reform package, which he expects Congress to complete by the end of the year, sparked debate among a number of politicians, economists and experts. Rep. David Scott (D-Georgia), a member of the Congressional Black Caucus who serves on the House Financial Services Committee, believes that the oversight council is the most critical component of the administration’s proposal.
“No one entity can regulate systemic risk because the financial industry is so complex and complicated. This will give us the ability to look around the corners to see what’s coming before it gets on us,†he says. He also urges that the council regularly reports to committees that oversee financial matters as well as Congress as a whole.
One measure met with opposition was formation of the CFPA, which would regulate, among other financial products, mortgages and credit cards. Wayne Abernathy, executive director of Financial Institutions Policy and Regulatory Affairs at the American Bankers Association, maintains that such an agency could actually be more costly to the consumer. If firms are able to offer only a limited number of products, prices will be higher because less risk would be spread across a given lender’s financial offerings. He also voiced concerned that other financial regulators would not require the same standard of accountability as banking regulators.
Rep. Mel Watt (D-North Carolina), a member of the Congressional Black Caucus that serves on the House Financial Services Committee, says the CFPA would actually result in fewer costlier products.
“To the extent that firms have been making products that people don’t understand, that they can’t afford to repay, and that are not beneficial to them when they really understand what they do is the agency’s purpose, from my perspective it shouldn’t be a criticism, but a blessing,†says Watt, who supports the creation of the new agency. He does, however, expect some lawmakers to oppose the idea of funding an agency to assume jurisdictions already held by other regulatory bodies.
Congressman Edward Royce (R-California), another member of the House Financial Services Committee, argues that CFPA
wouldn’t be necessary if regulators performed their jobs. If not for the current recession, the Bernie Madoff scandal may not have been uncovered even though the SEC investigated the firm eight times during a 16-year period. “If we had effective enforcement of consumer protection in each of these agencies, you could achieve that goal without adding the expense of a separate institution that in many ways is another layer of bureaucracy,†he asserts.
Some lawmakers and experts question the wisdom of expanding the Fed’s authority, maintaining the body should mainly focus on monetary policy. Moreover, they voiced their disappointment with the central bank’s handling of bailouts thus far.
Says Congressman Edward Royce (R-California), a member of the House Financial Services Committee: “In my view, giving [the Fed] that much authority risks diffusing its focus on monetary policy and keeping the dollar stable. I believe the reason some economists are concerned about this particular provision is because they believe it will lead to a loss of strength in the dollar as you morph the Fed’s responsibility into this competing goal. Bailouts create winners and losers in the marketplace when government pull comes into the decision-making process. I’d like to see that removed from the legislation.â€
The “too big to
fail†concept also troubles Rep. Spencer Bachus (R-Alabama), who maintains that he agrees with 70% of what Obama outlined in his speech. “Whether a company is big or small, it should be allowed to fail,†says Bachus. “I don’t believe in too big to fail because that means too small to save and you’re unbalancing the playing field if people think big corporations have the government standing behind them.â€Brookings Institute fellow Douglas Elliot disagrees. “It’s clear after this crisis, that there are a number of large institutions that are capable of being the domino that starts the rest of the financial institutions to fall over,†he says, “so it’s definitely useful that the Fed and to a lesser extent the FDIC, will have greater authority to deal with troubled institutions, not just in the banking industry but also other related financial institutions,†Congress, which will have to approve any reforms, will almost immediately begin holding committee hearings. Obama is hoping the legislation will be ready for his signature by the end of this year.
Resources:
White Paper: Financial Regulatory Reform
Fact Sheets:
Requiring Strong Supervision And Appropriate Regulation Of All Financial Firms
Strengthening Regulation Of Core Markets And Market Infrastructure
Strengthening Consumer Protection
Providing The Government With Tools To Effectively Manage Failing Institutions
Improving International Regulatory Standards And Cooperation