The Middle Path to Financial Regulatory Reform

Last week, a high-profile group of investor advocates published a report that provides practical recommendations on how to reform the U.S. financial regulatory system.  Known as the Investors' Working Group (IWG), this independent, non‐partisan panel was formed to provide an investor perspective on ways to improve the regulation of U.S. financial markets.  The group is led by former SEC chairmen William Donaldson and Arthur Levitt and, among other things, recommends establishing a Systemic Risk Oversight Board rather than placing this responsibility in the hands of the Federal Reserve.  Here is a summary of their proposals.

1. Designating a systemic risk regulator, with appropriate scope and powers. One option would be for the Systemic Risk Oversight Board to evolve into a full‐fledged regulator.


2. Adopting new regulations for financial services that will prevent the sector from becoming dominated by a few giant and unwieldy institutions. New rules are needed to address and balance concerns about concentration and competitiveness.


3. Strengthening capital adequacy standards for all financial institutions. Too many financial institutions have weak capital underpinnings and excessive leverage.


4. Imposing careful constraints on proprietary trading at depository institutions and their holding companies. Proprietary trading creates potentially hazardous exposures and conflicts of interest, especially at institutions that operate with explicit or implicit government guarantees. Ultimately, banks should focus on their primary purposes, taking deposits and making loans.


5. Consolidating federal bank regulators and market regulators. Regulation of banks and other depository institutions may be streamlined through the appropriate consolidation of prudential regulators. Similarly, efficiencies may be obtained through the merger of the SEC and the Commodity Futures Trading Commission (CFTC).


6. Studying a federal role in the oversight of insurance companies. The current state‐based regulation makes for patchwork supervision that has proven inadequate to the task.

This report offers a middle path on many issues under debate today and may prove to be the best way forward for all involved.