Blogs & Comment

Overhaul of U.S. financial regulation

The U.S. Congress passed this weeksweeping financial-reform legislation, the Wall Street Reform and Consumer Protection Act. The 2,300-page bill creates several new regulatory agencies and hands off to new and existing agencies the discretion to create regulations for the financial sector. Here are some of the main features:
Creation of the Office of Credit Ratings within the SEC to monitor credit-rating agencies (which assigned AAA grades to mortgage debt that blew up during the financial crisis). Investors can sue the agencies.
Creation of the Bureau of Consumer Financial Protection within the Federal Reserve to formulate rules for consumer-finance products (to guard against abuses such as liar and other exotic mortgages).
The Government Accountability Office can audit emergency Fed actions. Fed banned from lending to individual companies and required to disclose details of certain loans (with lag).
To deal with moral hazard and protect the American taxpayer from further bailouts, regulators can seize and carry out an orderly liquidation of too big to fail financial firms (whose uncontrolled demise would otherwise threaten the financial system).
Trading of many derivatives to be moved to clearing houses and exchanges. Hedge funds need to register with SEC. Sellers of products like mortgage-backed securities need to retain an interest in the products.
Higher capital requirements sought for banks. Latter also prohibited from trading own capital and from engaging in some derivatives trading.
Establishment of Financial Stability Oversight Council to coordinate activity among the fragmented regulatory system. Office of Finance Research to track issues and problems.
SEC may impose fiduciary standards on brokers and grant authority to shareholders to participate in nominating directors at financial firms. Financial executives’ incentives to pursue risky strategies somewhat tempered by giving shareholders the right to non-binding votes on pay and golden parachutes.
Reaction to the bill has been mixed. One problem is that a lot of critical detail has been left to regulatory bodies to flesh out and the final shape of the new regulatory environment may not be known for over a year. And it is still an open question whether the regulators many who were around when the financial crisis unfolded — will exercise their powers judiciously and effectively.
The bill did not deal with all the issues, particularly the role of Fannie Mae and Freddie Mac. Some of these issues may be addressed later on.
Many commentators are of the view the bill has been diluted down by concessions to lobbyists. PIMCOs founder and co-CIO, Bill Gross, for example, thinks Wall Street still owns Washington. He would rather have seen former Federal Reserve Chairman Paul Volcker appointed Dictator-In-Chief” than the bill that willnow be signed into law by the President