Treasury Releases Report on Regulatory Overhaul for Financial Services
 
April 7, 2008
 

On March 31, 2008, Treasury Secretary Henry Paulson unveiled his final report that serves as a potential blueprint for an overhaul of the regulatory structure governing all financial services, not just financial institutions. While the focus on how to improve the financial services regulatory structure began in March 2007, it has clearly received heightened attention on Capitol Hill and at the SEC in light of the recent liquidity crunch experienced by Bear Stearns.

The report reviews the historical evolution of the current system of functional regulation of the financial services industry, which maintains separate regulatory agencies across segregated functional lines of financial services, such as banking, insurance, securities and futures. The report finds that the current functional approach to regulation exhibits several inadequacies, including the fact that no single regulator possesses all of the information and authority necessary to monitor systemic risk, or to take coordinated action throughout the financial system to address problems related to financial market stability.

In the report, Paulson presents a series of “short-term” and “intermediate-term” recommendations and a long-term conceptual model for an “optimal” regulatory framework. The short-term recommendations focus on taking action now to improve regulatory coordination and oversight in the wake of recent events in the credit and mortgage markets. Specifically, the report recommends:

• empowering the President’s Working Group on Financial Markets (which would be expanded to add heads of banking regulators) to serve as the inter-agency body to promote coordination and communication for financial policy – and extend its authority over all of Wall Street rather than just financial institutions
• creating a Mortgage Origination Commission which will set and regulate uniform minimum licensing qualification standards for state mortgage market participants
• ensuring that the Federal Reserve is the sole authority to draft regulations for national mortgage lending laws
• enhancing the temporary liquidity provisioning process during those rare circumstances when market stability is threatened

The intermediate-term recommendations focus on eliminating some of the duplication of the U.S. regulatory system and modernizing the regulatory structure applicable to certain sectors in the financial services industry. This would include:

• creation of a Commission of National Insurance that would have the power to oversee the organization, operation, regulation and supervision of national insurers and national insurance agencies
• merger of the Commodity Futures Trading Commission into the SEC
• updating and streamlining the self-regulatory organization (SRO) rulemaking process

Finally, in the long-term the report recommends the adoption of an objectives-based regulatory approach, with a distinct regulator focused on one of three objectives: market stability regulation; safety and soundness regulation associated with government guarantees; and business conduct regulation. The report proposes that an objective-based regulatory approach, rather than a functional-based approach can better react to the pace of market developments and encourage innovation and entrepreneurialism within a context of enhanced regulation.

http://www.treas.gov/press/releases/reports/Blueprint.pdf