While the major initiatives would take years to become a reality, Treasury Secretary Henry Paulson unveiled on Monday his agency's plan to revamp the U.S. financial regulatory bureaucracy.
During a press conference in Washington he suggested a long term path toward an optimal regulatory model but introduced short term and intermediate steps which could be implemented sooner.
The short-term goals proposed involve affirming the role of a group of regulators convened by the President through an executive order and the creation of a federal commission to oversee and set rules for a dark corner of the mortgage market.
In the near term, Treasury recommended that the government formalize the Presidential Working Group. It is an interagency group which brings together regulators to facilitate coordination and communication on market and policy issues. It would expand beyond regulators in financial markets to those in the entire financial sector.
Another short-term initiative addresses the lack of oversight in the mortgage market which led to the current housing crisis. The Mortgage Origination Commission, a federal agency, would set basic standards for states to follow in the mortgage origination process. Currently those regulations vary widely across all 50 states. The Commission would set up uniform minimum licensing standards and evaluate state systems.
Paulson noted that after the current economic crisis has passed, government can begin to make changes in other areas.
He said the systemically important payments and settlement systems which process over $13 trillion in daily transactions needs to be regulated, despite no imminent crisis in that sector. It would be overseen by the Fed.
He also suggested the merger of the Securities and Exchange Commission and the Commodities Futures Trade Commission, noting that the marketplace calls for it and it is difficult to see why they should be separate.
The market benefits achieved in the futures area should be preserved and we do not want to lose the CFTC's principles-based process for market exchange oversight, he said.
Meanwhile, as an alternative to the state-based regulatory system for insurance, the Treasury recommended creating a federal insurance charter. The Optional Federal Charter for Insurance would be used to avoid what he called the burdensome state-based system which creates market distortions, hinders product development and impacts the competitive of US insurers.
The Treasury also recommended revocation of the federal thrift charter and the closing Office of Thrift Supervision (OTS). Its functions would be assumed by the Office of the Comptroller of the Currency (OCC).
The long-term Optimal regulatory model would have three major branches.
Our work led us to recommend a regulatory model based on objectives, to more closely link the regulatory structure to the reasons why we regulate, Paulson said.
The ideal agencies are:
Market Stability Regulator - The first branch would focus on market stability across the entire financial sector. This job would go to the Federal Reserve, expanding its role beyond regulating bank holding companies. Under the plan, the Fed would be able to go wherever in the system it thinks it needs to go collect information and preserve stability from various institutions including commercial banks, investment banks, insurance companies, hedge funds and commodity pool operators.
Prudential Financial Regulator - The second regulator would focus on the financial health of financial institutions with federal backing. There would be just one federal bank charter as opposed to the current three. Its functions would include those of the Office of Thrift Supervision and the Office of the Comptroller of the Currency. In addition, the Treasury recommends the creation of a federal insurance charter.
Conduct of Business Regulator - The third branch would have the responsibility of protecting consumers and investors. It would monitor business conduct across all types of financial firms. The new agency would assume many of the roles carried out by the Commodities Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC).