US PRESIDENT Barack Obama has unveiled a major overhaul of US financial regulation aimed at protecting investors and consumers, and preventing future financial crises.
The plan, which must be approved by Congress, would give the US Federal Reserve authority to regulate major financial institutions like insurance giant AIG; increase capital requirements for big banks; allow the federal government to take over ailing institutions before they fail; and increase regulation of hedge funds and derivatives.
A new consumer financial protection agency would ensure that loan and mortgage agreements state clearly the obligations of the consumer. Originators of mortgages will also be required to retain part of the value of each securitised loan they issue to ensure they have a stake in it being repaid.
In what could be the biggest regulatory reform since the 1930s, the proposals mean big US companies ranging from Wall Street banks and insurers to General Electric face fundamental changes in the way they are regulated.
Remuneration and profits in Wall Street and beyond could be hit by the reforms, which will see the administration attempt to tighten capital and leverage rules at global banks in negotiation with the Basel Committee on Banking Supervision.
“We did not choose how this crisis began,” Mr Obama said as he unveiled his plan at the White House yesterday.
“But we do have a choice in the legacy this crisis leaves behind. So today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.”
The president acknowledged that his proposals would disappoint those who wanted tougher regulation of the financial services industry and would alarm conservatives by expanding the government’s role in the markets.
“There are those who will say we do not go far enough, that we should have scrapped the system altogether and started again. I think that would be a mistake.
“Instead, we have crafted reforms to pinpoint the structural weaknesses that allowed for this crisis and to make sure that these problems are dealt with so as to prevent crises in the future,” he said.
“There are also those who will say we are going too far. But the events of the past few years offer ample testimony for the need to make significant changes. The absence of a working regulatory regime over many parts of the financial system – and over the system as a whole – led us to near-catastrophe.”
Republicans in Congress reacted cautiously to Mr Obama’s proposals, but the US Chamber of Commerce criticised the planned consumer protection agency and warned against adding new layers of regulation.
“While the administration has made several positive recommendations, we’re concerned that, overall, the proposal simply adds to the layering of the system without addressing the underlying and fundamental problems.
“We can’t simply insert new regulatory agencies and hope that we’ve covered our bases,” said David Hirschmann, who heads the chamber’s Centre for Capital Markets.
The administration sees the new rules as a rejection of the light-touch approach that held sway under former Federal Reserve chairman Alan Greenspan and previous administrations, which Mr Obama and his advisers blame for causing the crisis.
“A culture of irresponsibility took root from Wall Street to Washington to Main Street,” Mr Obama said yesterday. – (Additional reporting: Copyright The Financial Times Limited 2009)
