Financial Reform Watch

Testimony from academics and industry during today’s House Financial Services Committee hearing produced broad bipartisan consensus that the current regulatory structure is outdated. Testifying on behalf of industry were leaders from the Independent Community Bankers Association (ICBA), the Financial Services Roundtable, the American Bankers Association (ABA), and the Securities Industry and Financial Markets Association. As the committee’s first major hearing following the federal financial rescue efforts, it covered a wide swath of issues outlined below. 

• Creation of a Select Committee on Financial Reform—Chairman Barney Frank and several members supported this idea. In addition to Financial Services Committee members, a select committee would include members from the House Committees on Oversight and Government Reform, Agriculture, and Ways and Means. One of the academic witnesses, University of Rochester President Joel Seligman, suggested a commission modeled after the 9-11 Commission. 
• Derivatives—What role did credit default swaps play in the financial crisis? Should there be increased capitalization requirements for derivatives’ issuers? The questions remain, but most agreed on the need for increased oversight of complex financial derivatives. 

• Broad-Based Reform—Former Federal Reserve Vice Chairman Alice Rivlin suggested a range of new mortgage regulations, including uniform minimum standards requiring minimum down payments and documentation; elimination of adjustable rates and prepayment penalties; authority for bankruptcy judges to renegotiate mortgage loans; and the requirement that the buyers of securities, not the sellers, pay rating agency fees. The ABA echoed the opinion of several panelists who support creating a federal regulator charged with monitoring the entire economy in order to identify financial fault-lines that might lead to systemic risk. There was also discussion of the Paulson "blueprint" Treasury issued last spring that would consolidate financial regulators into three areas: a market stability regulator (the Fed); a new prudential financial regulator (covering the roles of the Office of Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration); and a new business conduct regulator (capturing some roles of banking regulators, the Commodity Futures Trading Commission, and the SEC).
• Mark-to-Market Accounting—The industry panel overwhelmingly opposed mark-to-market accounting rules. Chairman Frank, who was not receptive to this idea during the TARP legislative negotiations, acknowledged that a modification may be needed.

These issues will continue to be the subject of intense debate for the foreseeable future. There are nine different House and Senate hearings scheduled in the next two weeks, with Congress not even in session.