The Obama administration will target critical weaknesses in the troubled U.S. financial system, such as thin bank capital cushions and eroded lending standards, when it proposes an overhaul of financial regulation this week, two senior officials said on Monday.
In the fullest summary to date of the administration's reform proposal, Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers said the plan will also urge stronger consumer and investor protections and new powers for the Federal Reserve.
The two officials outlined the plan in The Washington Post ahead of the release on Wednesday of a detailed package of proposals that has been under discussion for six months.
Months of debate in Congress over the plan lie ahead, with time on the side of the status quo, especially if the economy continues to improve and public outrage at the banks begins to fade. Administration officials have argued a rewrite of U.S. financial rules is needed to prevent future crises.
The outline offered few new details on elements of the plan that were already known and sidestepped unanswered questions about streamlining bank supervision, restraining executive pay and regulating over-the-counter (OTC) derivatives.
But it did clearly underline the administration's determination to give the Fed a central role, and to create a new way for the federal government to handle troubled firms whose failure could pose a risk to the economy.
President Barack Obama will make remarks on Wednesday on his comprehensive plan for new rules of the road for the financial industry, a White House official said. Geithner will joint him at the event.
The Treasury secretary and Summers said that a key administration goal will be raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms.
In addition, they said, large and interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system.
These dual proposals -- making the Fed a systemic risk regulator and creating a related inter-agency council in the same area -- come amid concerns by some lawmakers and other regulators about the Fed getting too much power.
NEW RULES FOR SECURITIZED PRODUCTS
The officials said the plan will propose new reporting requirements for issuers of asset-backed securities, as well as a rule saying that securitizers must retain a financial interest in the performance of the asset-backed securities they are involved in issuing.
Securitization, or the packaging and selling of loans as securities, has been blamed by critics for eroding lending standards in the mortgage business.
A Treasury spokesman said the administration would propose requiring lenders to retain 5 percent of the risk they securitize. A bill to do this was approved in May by the U.S. House of Representatives, but is languishing in the Senate.
Addressing another market implicated in the crisis, the officials said the Obama plan will urge oversight of OTC derivatives. It will call for unspecified harmonizing of futures and securities regulation, and stronger payment and settlement systems, they said.
All derivative contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse, according to the piece in the Post.
It also said the plan will call for a new mechanism for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system.
This resolution authority proposal was sketched out earlier by the administration in draft legislation that would confer these powers on the Federal Deposit Insurance Corp.
The idea behind the proposal is to create a new way to seize and unwind troubled large firms that are not banks, and avoid on-the-fly approaches such as last year's costly bailout of mega-insurer American International Group.
The plan will urge reducing investors' and regulators' reliance on credit-rating agencies, the officials said, in a provision likely to affect credit rating giants such as Standard & Poor's and Moody's Corp.
They also said the United States will lead the effort to improve regulation and supervision around the world.
On bank supervision, Geithner has previously said the administration will streamline financial regulation. But he has stopped short of endorsing particular changes.
One proposal with some political support is merging the Office of Thrift Supervision, which mainly regulates mortgage lenders, with the Office of the Comptroller of the Currency, which regulates some of the nation's largest banks.
No mention was made in the outline of that idea. Nor was any mention made of possibly merging the Securities and Exchange Commission and the Commodity Futures Trading Commission. Such a move was once seen likely, but is off the table, said sources familiar with administration discussions.
(Additional reporting by Tim Ahmann and Karey Wutkowski; Editing by James Dalgleish)