Financial Regulatory Reform
“Over the past two years, we have faced the most severe financial crisis since the Great Depression. The financial system failed to perform its function as a reducer and distributor of risk. Instead, it magnified risks, precipitating an economic contraction that has hurt families and businesses around the world.” (Geithner & Summers)
While the current crisis had many causes, it is clear that the government could have done more to prevent many of the problems from growing out of control and threatening the stability of our financial system. Gaps and weaknesses in the management and regulation of financial firms presented challenges to ...view middle of the document...
The first objective is to “promote robust supervision and regulation of financial firms.” The first objective argues that financial institutions that are critical to market functioning should be subject to strong oversight. The aftershock of crisis tells us that no financial firm that could pose a significant risk to the financial system should be unregulated or weakly regulated because very much depends on it. The government assumes that they need a clear accountability in financial oversight and supervision of the major financial firms. In going forward with the plan a new Financial Services Oversight Council will be created of financial regulators. The new council will be composed of the Treasury secretary and the heads of seven agencies. The council will identify firms that could pose systemic risk or market risk. Systemic risk affects the entire market and cannot be diversified. The council will also resolve jurisdictional disputes among the agencies or improve the cooperation between them. Also, a new authority for the Federal Reserve will be given to supervise all firms that could pose a threat to financial stability or jeopardize the stability of the financial system. New standards and stronger capital will be required for all financial firms. Understandably, higher standards will be required for large and interconnected firms because more depends on them and very much damage will occur if only one of those large firms would crash such as the Lehman Brothers. Large firms would need to raise stronger capital to hold against losses, in other words to have a secure future. Some large financial institutions disagree with that measure because it would reduce their profitability and make them less competitive with smaller companies that have lower capital rates. A new National Bank Supervisor will be created by the merger of the Office of the Comptroller of the Currency and the Office of Thrift Supervision. The Thrift charters would be eliminated and would become commercial banks. The elimination of the federal thrift charters and other loopholes happened because it allowed some banks to avoid the bank holding company regulations held by the Federal Reserve System. The new National Bank Supervisor would regulate and supervise all federally chartered depository institutions or banks. Hedge fund advisers with assets under management exceed a given point and other private pools of capital will be required to register with the Securities and Exchange Commission and open their books to the regulators under the Investment Advisers Act. The advisers should be required to report information on the funds they manage that is adequate to assess whether any fund poses a threat to financial stability.
The second objective of the proposed reform is to “establish comprehensive supervision of financial markets.” The purpose of the objective is that the major financial markets must be strong enough to withstand both system wide crisis and the failure of...