The Obama Plan: an Initial Review
President Obama today released the long-awaited proposal for reform of the regulatory structure overseeing the financial services industry. It is a sweeping proposal with broad implications for the entire industry. It reshuffles regulatory powers, combines some agencies, creates a new one and extends federal regulatory powers to products and firms which are currently not federally regulated or regulated at all. Congress, the industry,the media and other stakeholders are poring over the 85-page "white paper" describing the proposal. Click here to go to the document.
Brief Summary
1. Avoid Future Systemic Risk/Promote Robust Supervision and Regulation – Raise capital and liquidity requirements for banks and systemically significant financial firms; establish a Financial Services Oversight Council of regulators to coordinate and prevent systemic risk; establish a new National Bank Supervisor in Treasury to oversee federally chartered banks; bring hedge funds and other private pools of capital into the regulatory framework; require public companies to hold non-binding say-on-pay shareholder votes and have independent compensation committees; review accounting standards; establish the Office of National Insurance within Treasury to enhance oversight of the sector.
2. Reform the Structure of the Financial System – impose “robust” reporting requirements on issuers of asset-backed securities; reduce reliance on credit rating agencies; require the originator, sponsor or broker of a securitization to retain a financial interest in its performance; harmonize the regulation of futures and securities; safeguard payment and settlement systems; subject all derivatives trading to regulation; strengthen oversight of systemically important payment, clearing and settlements systems.
3. Protect Consumers and Investors – improve the SEC’s ability to protect investors and establish a new Consumer Financial Protection Agency to identify gaps in supervision and enforcement; ensure the enforcement of consumer protection regulations; improve state coordination; and promote consistent regulation of similar products.
4. Enable the Government to Manage Financial Crises -- establish a resolution mechanism, similar to the FDIC’s, for non-bank financial firms and subject those whose failure could harm the financial system (Tier I Financial Holding Companies) to Fed supervision; require the Fed to get Treasury sign off when the Fed invokes its emergency lending authority for “unusual and exigent circumstances.”
5. Improve International Supervision and Coordination – improve oversight of global financial markets; strengthen the capital framework; coordinate supervision of international firms; enhance crisis management tools.
One of the major focal points of the plan is the role of the Federal Reserve. The plan enhances some powers of the Fed, diminishes others and puts the bank on the road to greater accountability and transparency. It is not surprising that the Fed emerges as the major systemic risk regulator in this proposal -- that had been under discussion for weeks. It is interesting that while enhancing the Fed's power in that regard the President proposes to diminish their autonomy to some degree by requiring them to seek permission from Treasury to use their emergency lending authority and by removing from their jurisdiction the mandate to protect the consumer from risky products and practices. This modulated approach to the Fed's powers will be received well by Members of both parties on Capitol Hill who have expressed some concerns, for a variety of reasons, with the accretion of power by the Fed during this crisis.
The plan's reach into the insurance industry is also worthy of note. By setting up a new national insurance office in the Treasury, the plan would put in place an infrastructure that some might see as the stalking horse for outright federal regulation of the industry. The initial purpose of the office would be to examine the industry and look for regulatory gaps that might expose other financial institutions to undue risk. If the office were to find a company in a risky position, it would recommend to the Fed that it step in using new regulatory powers to force the company to increase capital and/or take other steps to mitigate risk. While this proposal leaves intact the state regulatory structure for the insurance industry, it is sure to induce the industry and some on Capitol Hill to seek to attach the optional federal charter concept to the legislation required to implement the Obama plan.
Significant Capitol Hill activity can also be expected surrounding the proposals to regulate hedge funds and private equity firms. These firms have been working hard to avoid federal regulation in recent years, but the momentum is now very strong for that to occur. So we expect a battle over the extent of the regulation. A key issue may be a size threshold for determining which companies or funds are subject to federal oversight.
We will be continuing to review the details of this proposal and the reaction to it. Stay tuned for further updates.
Fact Sheet 1 -- Regulatory Reform; Fact Sheet 2 -- Core Markets and Infrastructure; Fact Sheet 3 -- Consumer Protection; Fact Sheet 4 -- Government Tools; Fact Sheet 5 -- International Regulatory Standards
