IREF - Institut de Recherches Économiques et Fiscales
Pour la liberté économique et la concurrence fiscale
"We want to accelerate the pace of change on the reform agenda," Treasury Secretary Timothy Geithner said in an interview after a meeting of the Group of 20 finance ministers and central bankers over the weekend. Mr. Geithner was pressed for action on the regulatory front at the meeting, held just outside London. The administration’s goal is to unveil its proposals before G-20 heads of state meet April 2, to wrest leadership of the thorny topic.
President Barack Obama has pitched a regulatory overhaul as a way to help forestall another financial crisis in the future. Many Democrats and some Republicans blame lax, misdirected or weak oversight in part for precipitating the current one.
Officials know they face a delicate balancing act. In making changes to address some of the crisis’s causes, they must avoid moving too aggressively and risking a further interruption of the flow of credit.
Administrations often issue such blueprints for change, and often they don’t go far. Former Treasury Secretary Henry Paulson laid out his wish list for regulatory change a year ago, but it was pushed to the side as troubles intensified. This time, there appears to be momentum. The administration already is working with Congress on the plans, most of which need its approval.
Mr. Geithner’s agenda closely resembles some of the priorities laid out recently by Fed Chairman Ben Bernanke and House Financial Services Committee Chairman Barney Frank (D., Mass.), both important players in determining whether the concepts become law.
A few elements remain unclear, in particular whether the administration will embrace one of Rep. Frank’s more controversial proposals : letting state attorneys general prosecute national banks. It is also unclear whether the administration will call for restrictions on compensation of bank executives, another issue Rep. Frank has pushed.
Mr. Geithner is expected to call for the government to have comprehensive authority over all financial products marketed to consumers, including the consistent enforcement of consumer-protection laws related to mortgages and credit cards. The plan isn’t expected to delve in great detail into the specifics of new policies in this area. That could open the administration to criticism from Democrats that the government isn’t doing enough to protect Main Street.
Mr. Geithner has said he wants any changes to be made in coordination with other countries. Still, each is likely to implement new financial regulation on its own. There remain big differences over how much to regulate financial players such as hedge funds — private investment partnerships for institutions and the wealthy — with Germany and France wanting much stricter oversight than the U.S.
"We are going to be ambitious, but we are going to work with them," Mr. Geithner said.
A major component of the plan would be new clout for the Federal Reserve, which already runs monetary policy and has accumulated large new powers since the financial crisis began.
The balkanized structure of financial-services regulation has meant that no one institution had the ability to look broadly at markets to spot signs of systemic risk, such as huge bets made by investment banks on mortgage debt.
Mr. Geithner wants the Fed to have the authority to do so.
At the same time, the Treasury hopes to define the Fed’s new powers clearly, so as not to create the expectation it would rush in to solve every problem. The new powers are likely to include some kind of oversight of extremely large hedge funds.
Another plank would overhaul the way government monitors the payment and settlement system, the little-known but vitally important plumbing through which money flows from one bank to another. This is a crucial cog in credit markets, as it allows banks to clear payments and borrow money from each other overnight. When this system malfunctions, banks can quickly run out of money to fund their operations.
Mr. Geithner raised concerns about the lack of monitoring of this system last year when he was president of the Federal Reserve Bank of New York. Both Bear Stearns Cos. and Lehman Brothers Holdings Inc. ran into trouble in part because their funding from this source suddenly dried up. The Fed could be asked to play a role in overseeing the system and seeking more transparency.
Proposed changes to the payment and settlement system could also create a central body to process and monitor trades in derivatives, which are financial contracts whose value varies with the value of some other asset. Creating a derivatives clearinghouse would aim to prevent problems such as those at American International Group Inc., whose near-collapse last fall threatened havoc because no one could get a handle on its vast operation in credit-default swaps, a type of financial insurance.
Under the regulatory overhaul, major financial institutions would face tougher capital requirements. The level of capital is typically seen as an important component of a bank’s health because it is a cushion against unexpected losses.
Existing rules allow banks to hold lower levels of reserves when markets are performing well. The result can be that banks run perilously low on capital if conditions shift, such as if repayment of loans slows significantly. This is one reason the Bush administration launched its plan to pour $250 billion into recapitalizing the banking sector late last year.
The Obama plan is likely to contain ways to make capital requirements less likely to drift lower during strong years for banks. The result could be to require banks to hold more capital during good times — capping growth — so those reserves can be safely drawn down if the economy turns sour — freeing up more funds for lending.
The plan is expected to ask Congress to give regulators the power to take over a financial company whose collapse would threaten financial markets. It’s not yet clear which agency might hold this authority. Some in Congress believe it should belong to the Fed, while others are pushing for consideration of the Federal Deposit Insurance Corp.
Mr. Geithner also wants to streamline the way the government oversees banks to prevent lenders from seeking out the regulator with the lightest touch. One result is expected to be a consolidation of consumer-protection powers, which are currently shared among the Fed, the FDIC, the Federal Trade Commission and other regulators.
Any proposed changes would be controversial because the various state and federal agencies that oversee financial services regularly jostle for turf.