Will the Fed get a ton of new powers?
Secretary of the Treasury Tim Geithner and National Economics Council Chair Larry Summers have an op-ed this morning describing the administration's financial regulation overhaul. Some brief thoughts before I go consult the experts:In addition, all large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system.While regulators monitoring systemic risk is a positive step, wouldn't it be better to sharply limit it as well?
The administration's plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.Limiting influence of credit-rating agencies is smart but may be difficult in practice. Requiring originators to hold on to a financial interest in a security isn't a bad idea, but it came under a lot of fire from conservatives and financial sector lobbyists when it appeared in Rep. Barney Frank's mortgage regulation bill; meanwhile, consumer advocates think that a small financial interest (~5 percent) isn't enough liability and that legal accountability should flow up the line instead, with originators remaining legally accountable to investors who in turn should be legally accountable to borrowers.
All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse.That's good.
Building on the recent measures taken to fight predatory lending and unfair practices in the credit card industry, the administration will offer a stronger framework for consumer and investor protection across the board.Er, what does this mean? It sounds like they're still fighting the battle between an Elizabeth Warren-style Financial Product Safety Commission and simply strengthening consumer regulations; an FPSC would be much more effective and consumer-friendly, which is, of course, why the financial industry opposes it.
We will establish a resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system. This authority will be available only in extraordinary circumstances, but it will help ensure that the government is no longer forced to choose between bailouts and financial collapse.Still nebulous on the resolution authority -- who will control it? How it will it function? I'm really missing Summers' speech on Friday, when he said that "we will not have a financial system that is failsafe until we have a financial system that is safe for failure." The new regulatory regime will be a major part of this week's economic storyline, but I sure hope they have more details available for Geithner when he faces the Senate Banking committee on Thursday, otherwise it will be February's unfortunate financial rescue plan announcement all over again.
-- Tim Fernholz
