The Obama Administration is expected to release a comprehensive financial regulation reform plan this week, the summary of which was revealed in an op-ed piece by Treasury Secretary Timothy Geithner and National Economic Council Chairman Lawrence Summers, published in The Washington Post this morning.
The administration has focused on five key areas:
- Raising capital and liquidity requirements for all institutions, consolidated supervision by the Federal Reserve for “too big to fail” firms and establishing a council of regulators for better coordination
- Robust reporting requirements on the issuers of asset-backed securities, reducing reliance on credit-rating agencies, harmonizing the regulation of futures and securities, and strong oversight of “over-the-counter” derivatives
- Stronger framework for consumer and investor protection
- Resolution mechanism for the orderly resolution of “too big to fail” financial holding companies
- Improving regulation and supervision around the world
We totally agree that the regulation of the financial system urgently needs to be strengthened to avoid any crisis of current magnitude and dimensions in the future. In addition to the lack of exercise of regulatory powers (for whatever reasons), one of the main contributors to the current crisis was the complex and uneven regulatory system, which gave way to gaps and differences in degrees of oversight.
As a result, the financial institutions were able to shift risky products to less-regulated entities or entities having favorable accounting treatment. This calls for consolidated supervision of parent companies and all related entities as well as better coordination among all regulators.
The OTC derivatives include credit default swaps that caused the near-collapse of AIG (AIG). In view of the enormous size of the market and the threats these instruments pose to the financial system, their regulation is long overdue.
Also required is stronger coordination with regulators of other countries so as to effectively regulate financial giants like Citigroup (C), Bank of America (BAC) and JP Morgan Chase (JPM), which have operations all over the world.
Read the full analyst report on “AIG”
Read the full analyst report on “C”
Read the full analyst report on “BAC”
Read the full analyst report on “JPM”
Zacks Investment Research
