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Towards tighter regulation
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Altogether there will be a greater emphasis on disclosures.
The new rules and regulations for the U.S. financial sector, unveiled by President Barack Obama recently, are meant to strengthen the foundations of a system that was until recently seen as tottering. After being engaged for nearly a year in saving the system, policy makers have turned their attention on reinforcing the structures to prevent a recurrence. Regulators are to be equipped to anticipate and minimise risks in every part of the system. Obviously, the role of the state in the financial sector will expand dramatically, a development that would only legitimise what has been happening over the past several months. Mr. Obama has said these will lay a new foundation to “curb risks built on piles of sand.” Containing risks in areas previously unsupervised will get priority. Supervision of very large firms will be consolidated with the Federal Reserve. All firms will be called upon to provide more capital and liquidity, with the larger firms contributing more. The Fed will be advised by a council of regulators, who will scan the horizon for any new risks. A mechanism to help authorities unwind giant institutions has also been proposed.
Perhaps the most significant of the proposals is the creation of a Consumer Financial Protection Agency (CFPA) that will be vested with some of the powers that the Federal Reserve and other regulators are now holding. It will frame rules and have enforcement powers over mortgages, credit cards, and the like. Securitisation, derivatives and other complex instruments that have been at the root of the crisis will receive special regulatory attention. Altogether there will be a greater emphasis on disclosures. Firms that structure large deals and sell debt as securities will be asked to retain a percentage of the transaction. This would inculcate greater responsibility and ensure sounder lending practices. Earlier proposals to rein in complex instruments will be further strengthened and those instruments not traded on exchanges will pay higher regulatory charges. Most of these proposals will have to be approved by the U.S. Congress. There is bound to be ideological and jurisdictional opposition. There is a fear that some of these, especially the creation of the CFPA, might stifle innovation by focussing excessively on risk avoidance. Finally, there has been no attempt to rationalise and unify regulation; there would still be four federal regulators. However, even if the new rules do not go all the way, there is no doubt that their adoption will lead to a better-supervised financial system in the U.S. and around the world.
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