US Treasury outlines sweeping financial regulatory reforms

July 25th, 2009

Companies and investors who want a glimpse into the nature of future financial regulatory reforms will find a helpful starting point in the US Treasury Department’s white paper on “Financial Regulatory Reform, A New Foundation.” This paper was released in mid-June 2009. The reforms outlined in the paper will have the most direct effects on companies in the financial services industry, but they will also affect directors and shareholders in other industries. The full effects of the changes are still evolving, but the expectation is that they will help investors and consumers avoid unpleasant surprises like those experienced in 2008 and early 2009. Basically, the reforms seek to modernize systems that have not kept pace with decades of financial innovation. These outdated systems resulted in risks that were not apparent to regulators, companies, and investors in the months leading up to the financial crisis, and they forced the government to take extraordinary measures to revive the economy.

There are five key areas for which reforms are being considered:

  • Financial firms. The white paper suggests a series of reforms that are designed to strengthen the foundation for supervision and regulation of financial institutions. These reforms include: (1) establishing a new Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation, (2) granting more authority to the Federal Reserve Board to supervise all firms that could pose a threat to financial stability, and (3) introducing a number of other changes, such as creating a new National Bank Supervisor for all federally chartered banks, eliminating the Office of Thrift Supervision, and empowering the SEC to require registration of advisers of hedge funds and other private pools of capital.  

  • Financial markets. The paper suggests that the regulation of financial markets could be strengthened through added requirements for market transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitized loans. Other potential reforms include comprehensive regulation of over-the-counter derivatives (including credit default swaps), and empowerment of the Federal Reserve to oversee payment, clearing, and settlement systems.

  • Investors and consumers. Several reforms are designed to help investors and consumers by promoting simplicity, fairness, and accountability. These include: (1) creation of a new Consumer Financial Protection Agency to protect consumers from unfair, deceptive, and abusive practices, (2) enactment of stronger regulations for consumer and investor products, and (3) a more level playing field and higher standards for ALL providers of consumer financial products and services, regardless of whether they are part of a bank.

  • US government. More tools could be made available to help the government manage any future crises. most notably, a new regime could be established for addressing potential failures of nonbank financial institutions.

  • International cooperation.  Recognizing that financial crises spread quickly around the world, the paper includes a section on raising international regulatory standards and improving international cooperation. The stated objectives are to reach international consensus on how to best improve oversight of global financial markets, enhance crisis management tools, strengthen the capital framework, and coordinate supervision of internationally active firms.

Buried on the final pages of this lengthy document are a few broad recommendations for accounting standards.  Specifically, the paper suggests that the FASB and IASB should strive to do the following by the end of 2009: (1) clarify and make consistent the application of fair value accounting standards, including the impairment of financial instruments, (2) improve accounting for loan loss provisioning, and (3) make substantial progress toward the development of a single set of high-quality global accounting standards. The paper mentions, but does not specifically endorse, the SEC’s proposed roadmap to adoption of IFRS for SEC reporting. The Commission plans to consider the comments received on that proposal.

The financial regulatory reforms outlined in the white paper are complex, and it will likely take time for lawmakers to analyze the effects of the recommendations. Will the need for study hinder the chances of getting these reforms approved in 2009? It is possible that the full package may not be approved. But, clearly, financial regulatory reform is a high priority now while the recent financial crisis is fresh in everyone’s minds, and the Administration will push hard to get at least some of these reforms approved.

The paper is available at http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.

 

Copyright © 2009 Center for Financial and Accounting Literacy

Entry Filed under: Governance

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