Yesterday, as part of the Obama Administration regulatory reform plan, Treasury released proposed legislation to Congress that would require “strong, consolidated supervision and regulation” for financial institutions and provide a regulatory regime that would “monitor, mitigate, and respond” to risks. Specifically, the legislation would:

1. Monitor and report on emerging risks through the creation of a financial services oversight council by:

  • Creating a financial services oversight council to facilitate coordination of financial regulatory policy and resolution of disputes and identify emerging risks in financial markets; and
  • Including the following principal federal regulators to the Oversight Council: Treasury Secretary, who would serve as Chair; the Chairman of the Federal Reserve Board; the Chairman of the CFTC; the Director of the proposed Consumer Financial Protection Agency; the Chairman of the FDIC; Director of the Federal Housing Finance Agency; Director of the proposed National Bank Supervisor; and the Chairman of the SEC.

2. Supervise and Regulate All the Largest, Most Interconnected Firms by:

  • Subjecting Tier 1 financial holding companies (FHCs) to consolidate supervision and regulation by the Federal Reserve, notwithstanding the fact that they may own depository institutions and will be subject to restrictions under the Bank Holding Company (BHC) Act;
  • Making Tier 1 FHC’s subject to more stringent standards than those that apply to other BHCs, which will focus on the risks that these firms could pose to the financial system as a whole and not just the individual institution;
  • Requiring prompt corrective action from large, interconnected firms should their capital levels decline; and
  • Requiring that each Tier 1 FHC submit a resolution plan to the Federal Reserve.

3. Raise Standards for All Financial Firms by:

  • Requiring all FHCs to be “well-capitalized” and “well-managed” on a consolidated basis, which would significantly raise minimum capital standards; and
  • Strengthening firewalls between banks and their affiliates.

4. Close Loopholes and Gaps in the Bank Regulatory System by:

  • Eliminating many exemptions from BHC Act coverage for credit card banks, industrial loan companies, thrifts and prior grandfathered non-bank banks; and
  • Subjecting all companies that control insured depository institutions to “robust, consolidated supervision and regulation” by the Federal Reserve, including the BHC Act nonfinancial activity limits.

5. Instill Comprehensive Regulation of Critical Markets by:

Requiring risk retention and transparency in securitization markets, including risk retention requirements for securitizers and secondary market disclosure requirements; and

Strengthening oversight by giving the Federal Reserve authority over “systemically important” payment, clearing and settlement activities and systems.

6. Strengthen Accountability for Emergency Authorities by:

Requiring prior written approval from the Treasury Secretary to receive emergency aid from the Federal Reserve.

7. Create an Office of National Insurance

The Obama Administration is expected to release more legislation tomorrow that will consolidate the OTS and the OCC, by creating a National Bank Supervisor and provide the government the necessary tools to respond to the financial crisis.