Today, in a speech before the Exchequer Club in Washington D.C., Michael Barr, Assistant Treasury Secretary for Financial Institutions, discussed the Obama Administration's ongoing initiative to implement financial industry regulatory reform, emphasizing that "we must reflect on the extraordinary path our economy and financial system has taken over the past two years, and debate and discuss the path that it can and should take going forward." Mr. Barr noted that, while recent "innovative" products such as securitization and tranching of asset-back securities, was intended to help spread credit risk, while "serving the needs of consumers" and spurring "growth" by "bring[ing] new players into the markets," innovation "outpaced the capacity of risk managers, boards of directors, regulators and the market as a whole to understand and respond" to underlying risks. In general, the system "failed to require transparency in key markets, especially fast developing ones."
He discussed three major areas of regulatory reform:
- Protecting Consumers - To rebuild trust in the markets, he stressed the need for "strong and consistent regulation and supervision of consumer financial services and investment markets," pointing to the draft legislation sent to Congress two weeks ago to create the Consumer Financial Protection Agency. The Consumer Financial Protection Agency would "create a level playing field for all providers, regardless of their charter or corporate form" and would "ensure high and uniform standards across the market."
- Systemic Risk - He noted that the industry "cannot have a system that depends on the foresight of a single institution or a single person to identify and prevent risks," and therefore, a Financial Services Oversight Council, is best prepared to "monitor for emerging risks and coordinate policy." However, for actual supervision and "operational integrity" of systemic risk, he asserted that the Federal Reserve is best suited "[t]o provide consolidated supervision and regulation of any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed."
- Basic Reform of Capital, Supervision, and Resolution Authority - With respect to capital, Mr. Barr stated that in order to provide for continued growth and innovation, it is essential for financial firms to raise capital buffers against losses, and the Administration has proposed raising capital standards "across the board." The intent is not to "limit the activities" of financial institutions, but rather "limit the risk that those activities can pose." He also briefly touched on "creating a more uniform system of regulation" through the proposed creation of a National Bank Supervisor, through the consolidation of the Office of Thrift Supervision and the Office of the Comptroller of the Currency, and the proposal to create a legal mechanism to resolve a non-bank financial institution or bank holding company, similar to the FDIC's resolution authority.