Today, Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers published a joint op-ed piece in the Washington Post outlining the case for financial regulatory reform and offering a brief preview of the proposals the Obama Administration will put forward this week "to modernize financial regulation and supervision" with the goal "to create a more stable regulatory regime that is flexible and effective" and "that is able to secure the benefits of financial innovation while guarding the system against its own excess." In developing its proposals, the Obama Administration has focused on the following "five key problems":
- Stability of System - Existing regulation focuses on the safety and soundness of individual institutions but not the stability of the system as a whole. The administration's proposal will address that problem by raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms. In addition, large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve and a council of regulators with broader coordinating responsibility across the financial system.
- Structure of Financial System - "The structure of the financial system has shifted, with dramatic growth in financial activity outside the traditional banking system, such as in the market for asset-backed securities." The administration's plan will impose regulations on derivatives and robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.
- Inadequate Consumer Protection - The current regulatory regime "does not offer adequate protections to consumers and investors" in such areas as subprime mortgage lending, credit cards and annuities. The administration will offer a stronger framework for consumer and investor protection across the board, building on recent measures taken to fight unfair practices in the credit card industry.
- Containing and Managing Financial Crisis - Relying on the Federal Reserve's lending authority to avert the disorderly failure of nonbank financial firms, "is not an appropriate or effective solution in the long term." The administration will establish a resolution mechanism, available only in extraordinary circumstances, that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system.
- Globalization - Domestic actions will "have little effect if we fail to raise international standards along with our own." The administration plans to "lead the effort to improve regulation and supervision around the world."
On Thursday, Secretary Geithner is set to testify before the Senate Committee on Banking, Housing and Urban Affairs, and the House Committee on Financial Services, with respect to the Obama Administration's proposals to modernize the financial regulatory system.