Regulatory Reform Moving Forward in 2010

It looks like the political environment in Washington is set to support a financial regulatory reform package this year. A recent poll published in The Hill demonstrates the sentiment for pushing forward on reform.  Here is what they had to say.

Washington insiders overwhelmingly believe Congress in 2010 will pass new regulations on the financial industry. According to a new poll by FD, a communications and strategy firm, 76 percent of Washington insiders say financial regulations will head to President Barack Obama’s desk this year. The FD survey included 300 insiders working in lobbying, government, media, nonprofits and think tanks, among other associations. The poll was conducted between Jan. 31 and Feb. 1 with an error margin of 5.7 percent.  The poll showed that insiders strongly believe Obama will attempt to move to the political center this year and that Congress will not pass healthcare reform, a limit on greenhouse gas emissions or new restrictions on campaign finance.

Is your organization prepared for the coming changes?  Visit www.WheelhouseAdvisors.com to learn how we can help.

Financial Regulatory Reform Debate Begins

Today, the U.S. House Financial Services Committee will welcome several experts to debate financial regulatory reform approaches.  Paul Volcker, former Federal Reserve Chairman and current Head of the President's Economic Recovery Advisory Board, will testify first by offering his views on how reforms should be enacted.   Here is an excerpt from his prepared testimony.

Important parts of the Administration’s proposed reforms can be – and some are being – implemented and enforced under existing authority. The Treasury has set out principles for capital and liquidity standards. Other prudential approaches are under consideration. Most notably risk management practices, for banks and certain other regulated institutions have been placed under urgent review. At the supervisors’ initiative, useful and needed steps are being taken to encourage more prudent compensation practices.

These are needed steps toward a stronger reformed financial system. However, I want to emphasize two inter-related issues of fundamental importance that run across the more particular elements of reform. One is a matter of broad regulatory practice: how to deal with the insidious, potentially risk-enhancing, spread of “moral hazard”, the presumption that systemically important institutions may be protected in the face of imminent failure. The overlapping question is one of administrative responsibility: in particular the appropriate role of the central bank (the Federal Reserve) in regulation, supervision and oversight of the financial system.

Mr. Volcker has defined the problem very well.  The answer lies in the need to decelerate the consolidation of financial institutions and accelerate the consolidation of regulatory oversight.  Just the opposite has occurred over the past few decades and led us to the brink of financial collapse.

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.