Yesterday, the House Financial Services Committee held a hearing entitled “Addressing the Need for Comprehensive Regulatory Reform,” to discuss in general terms the administration’s plan for regulatory reform. Testifying before the Committee was Secretary Treasury Timothy Geithner.

Although some Committee members looked to Secretary Geithner for details of the proposed regulatory changes, Geithner preferred to focus his testimony on the big picture, providing broad overviews of the proposed reforms. He stated numerous times how important it is for regulation to find the appropriate balance between different interests. This concept of “balance” was discussed in terms of tensions between protecting investors and incentivizing innovation, and in terms of giving the government sufficient power to better manage systemic risk while avoiding stifling overregulation. Secretary Geithner also noted that although a lot can be done in the US that will leave the financial system more protected, the US will also need to look for complementary changes in other countries and markets throughout the world in order for real change to be effected.

Secretary Geithner described the proposed regulatory reforms as being carefully crafted and designed, although some Committee members felt that the proposal was too “open-ended” and would give the government too much power and funding with too few details in place. Representative Green (D-TX), however, warned the Committee and Secretary Geithner against the danger of “the paralysis of analysis,” and reminded the Committee of the need to act quickly to address the financial markets crisis.

The main elements of the proposed reforms were:

  • Creating a single regulatory entity with responsibility for systemic stability;
  • Enforcing substantially more conservative capital requirements for institutions that pose systemic risk;
  • Requiring that leveraged private investment funds (i.e., hedge funds) above a certain size register with the SEC;
  • Establishing a comprehensive framework of oversight and disclosure for the OTC derivatives market, with centralized clearing and exchange trading for the more standardized parts of the OTC derivatives market;
  • Having the SEC develop requirements for money market funds to reduce the risk of rapid withdrawals; and
  • Establishing a resolution mechanism that gives the government the power to either:
    • wind down a company’s operations and absorb and allocate losses (in the case of a relatively small entity); or
    • take actions to inject capital and guarantee liabilities, in cases where it is deemed necessary to do so in order to protect the financial system and the broader economy from the potential failure of a large, complex financial institution.

In analyzing the Administration’s broad proposal, one should also look to the testimony on AIG earlier this week by Secretary Geithner and Chairman Bernanke and to Secretary Geithner’s speech to the CFR on Wednesday.