Obama Lays Out New Rules For U.S. Financial System

This afternoon President Obama and Treasury Secretary Tim Geithner have laid out their comprehensive regulatory reform plan for the U.S. financial system.

The President's plan will:

• Require that all financial firms that pose a significant risk to the financial system at large are subjected to strong consolidated supervision and regulation
  
• Increase market discipline and transparency to make our markets strong enough to withstand system-wide stress and the potential failure of one or more large financial institutions
  
• Rebuild trust in our markets by creating the Consumer Financial Protection Agency to focus exclusively on protecting consumers in credit, savings, and payment markets.
  
• Provide the government with the tools needed to manage financial crises so it is not forced to choose between bailouts and financial collapse
  
• Raise international regulatory standards and improve international coordination

A White Paper On Financial Regulatory Reform Can Be Found Here

SUMMARY OF RECOMMENDATIONS
Please refer to the main text for further details
I. PROMOTE ROBUST SUPERVISION AND REGULATION OF FINANCIAL FIRMS
A. Create a Financial Services Oversight Council
1. We propose the creation of a Financial Services Oversight Council to
facilitate information sharing and coordination, identify emerging risks,
advise the Federal Reserve on the identification of firms whose failure could
pose a threat to financial stability due to their combination of size, leverage,
and interconnectedness (hereafter referred to as a Tier 1 FHC), and provide a
forum for resolving jurisdictional disputes between regulators.
a. The membership of the Council should include (i) the Secretary of the
Treasury, who shall serve as the Chairman; (ii) the Chairman of the
Board of Governors of the Federal Reserve System; (iii) the Director
of the National Bank Supervisor; (iv) the Director of the Consumer
Financial Protection Agency; (v) the Chairman of the SEC; (vi) the
Chairman of the CFTC; (vii) the Chairman of the FDIC; and (viii) the
Director of the Federal Housing Finance Agency (FHFA).
b. The Council should be supported by a permanent, full-time expert staff
at Treasury. The staff should be responsible for providing the Council
with the information and resources it needs to fulfill its
responsibilities.
2. Our legislation will propose to give the Council the authority to gather
information from any financial firm and the responsibility for referring
emerging risks to the attention of regulators with the authority to respond.
B. Implement Heightened Consolidated Supervision and Regulation of All Large,
Interconnected Financial Firms
1. Any financial firm whose combination of size, leverage, and
interconnectedness could pose a threat to financial stability if it failed (Tier 1
FHC) should be subject to robust consolidated supervision and regulation,
regardless of whether the firm owns an insured depository institution.
2. The Federal Reserve Board should have the authority and accountability for
consolidated supervision and regulation of Tier 1 FHCs.
3. Our legislation will propose criteria that the Federal Reserve must consider
in identifying Tier 1 FHCs.
4. The prudential standards for Tier 1 FHCs – including capital, liquidity and
risk management standards – should be stricter and more conservative than
those applicable to other financial firms to account for the greater risks that
their potential failure would impose on the financial system.
5. Consolidated supervision of a Tier 1 FHC should extend to the parent
company and to all of its subsidiaries – regulated and unregulated, U.S. and
foreign. Functionally regulated and depository institution subsidiaries of a
Tier 1 FHC should continue to be supervised and regulated primarily by their
functional or bank regulator, as the case may be. The constraints that the
Gramm-Leach-Bliley Act (GLB Act) introduced on the Federal Reserve’s
ability to require reports from, examine, or impose higher prudential
requirements or more stringent activity restrictions on the functionally
regulated or depository institution subsidiaries of FHCs should be removed.
6. Consolidated supervision of a Tier 1 FHC should be macroprudential in
focus. That is, it should consider risk to the system as a whole.
7. The Federal Reserve, in consultation with Treasury and external experts,
should propose recommendations by October 1, 2009 to better align its
structure and governance with its authorities and responsibilities.
C. Strengthen Capital and Other Prudential Standards For All Banks and BHCs
1. Treasury will lead a working group, with participation by federal financial
regulatory agencies and outside experts that will conduct a fundamental
reassessment of existing regulatory capital requirements for banks and BHCs,
including new Tier 1 FHCs. The working group will issue a report with its
conclusions by December 31, 2009.
2. Treasury will lead a working group, with participation by federal financial
regulatory agencies and outside experts, that will conduct a fundamental
reassessment of the supervision of banks and BHCs. The working group will
issue a report with its conclusions by October 1, 2009.
3. Federal regulators should issue standards and guidelines to better align
executive compensation practices of financial firms with long-term
shareholder value and to prevent compensation practices from providing
incentives that could threaten the safety and soundness of supervised
institutions. In addition, we will support legislation requiring all public
companies to hold non-binding shareholder resolutions on the compensation
packages of senior executive officers, as well as new requirements to make
compensation committees more independent.
4. Capital and management requirements for FHC status should not be limited
to the subsidiary depository institution. All FHCs should be required to meet
the capital and management requirements on a consolidated basis as well.
5. The accounting standard setters (the FASB, the IASB, and the SEC) should
review accounting standards to determine how financial firms should be
required to employ more forward-looking loan loss provisioning practices
that incorporate a broader range of available credit information. Fair value
accounting rules also should be reviewed with the goal of identifying changes
that could provide users of financial reports with both fair value information
and greater transparency regarding the cash flows management expects to
receive by holding investments.
6. Firewalls between banks and their affiliates should be strengthened to protect
the federal safety net that supports banks and to better prevent spread of the
subsidy inherent in the federal safety net to bank affiliates.
D. Close Loopholes in Bank Regulation
1. We propose the creation of a new federal government agency, the National
Bank Supervisor (NBS), to conduct prudential supervision and regulation of
all federally chartered depository institutions, and all federal branches and
agencies of foreign banks.
2. We propose to eliminate the federal thrift charter, but to preserve its interstate
branching rules and apply them to state and national banks.
3. All companies that control an insured depository institution, however
organized, should be subject to robust consolidated supervision and
regulation at the federal level by the Federal Reserve and should be subject to
the nonbanking activity restrictions of the BHC Act. The policy of separating
banking from commerce should be re-affirmed and strengthened. We must
close loopholes in the BHC Act for thrift holding companies, industrial loan
companies, credit card banks, trust companies, and grandfathered “nonbank”
banks.
E. Eliminate the SEC’s Programs for Consolidated Supervision
The SEC has ended its Consolidated Supervised Entity Program, under which it
had been the holding company supervisor for companies such as Lehman
Brothers and Bear Stearns. We propose also eliminating the SEC’s Supervised
Investment Bank Holding Company program. Investment banking firms that seek
consolidated supervision by a U.S. regulator should be subject to supervision and
regulation by the Federal Reserve.
F. Require Hedge Funds and Other Private Pools of Capital to Register
All advisers to hedge funds (and other private pools of capital, including private
equity funds and venture capital funds) whose assets under management exceed
some modest threshold should be required to register with the SEC under the
Investment Advisers Act. The advisers should be required to report information
on the funds they manage that is sufficient to assess whether any fund poses a
threat to financial stability.
G. Reduce the Susceptibility of Money Market Mutual Funds (MMFs) to Runs
The SEC should move forward with its plans to strengthen the regulatory
framework around MMFs to reduce the credit and liquidity risk profile of
individual MMFs and to make the MMF industry as a whole less susceptible to
runs. The President’s Working Group on Financial Markets should prepare a
report assessing whether more fundamental changes are necessary to further
reduce the MMF industry’s susceptibility to runs, such as eliminating the ability
of a MMF to use a stable net asset value or requiring MMFs to obtain access to
reliable emergency liquidity facilities from private sources.
H. Enhance Oversight of the Insurance Sector
Our legislation will propose the establishment of the Office of National Insurance
within Treasury to gather information, develop expertise, negotiate international
agreements, and coordinate policy in the insurance sector. Treasury will support
proposals to modernize and improve our system of insurance regulation in
accordance with six principles outlined in the body of the report.
I. Determine the Future Role of the Government Sponsored Enterprises (GSEs)
Treasury and the Department of Housing and Urban Development, in
consultation with other government agencies, will engage in a wide-ranging
initiative to develop recommendations on the future of Fannie Mae and Freddie
Mac, and the Federal Home Loan Bank system. We need to maintain the
continued stability and strength of the GSEs during these difficult financial times.
We will report to the Congress and the American public at the time of the
President’s 2011 Budget release.
II. ESTABLISH COMPREHENSIVE REGULATION OF FINANCIAL MARKETS
A. Strengthen Supervision and Regulation of Securitization Markets
1. Federal banking agencies should promulgate regulations that require
originators or sponsors to retain an economic interest in a material portion of
the credit risk of securitized credit exposures.
2. Regulators should promulgate additional regulations to align compensation of
market participants with longer term performance of the underlying loans.
3. The SEC should continue its efforts to increase the transparency and
standardization of securitization markets and be given clear authority to
require robust reporting by issuers of asset backed securities (ABS).
4. The SEC should continue its efforts to strengthen the regulation of credit
rating agencies, including measures to promote robust policies and
procedures that manage and disclose conflicts of interest, differentiate
between structured and other products, and otherwise strengthen the integrity
of the ratings process.
5. Regulators should reduce their use of credit ratings in regulations and
supervisory practices, wherever possible.
B. Create Comprehensive Regulation of All OTC Derivatives, Including Credit
Default Swaps (CDS)
All OTC derivatives markets, including CDS markets, should be subject to
comprehensive regulation that addresses relevant public policy objectives: (1)
preventing activities in those markets from posing risk to the financial system; (2)
promoting the efficiency and transparency of those markets; (3) preventing
market manipulation, fraud, and other market abuses; and (4) ensuring that OTC
derivatives are not marketed inappropriately to unsophisticated parties.
C. Harmonize Futures and Securities Regulation
The CFTC and the SEC should make recommendations to Congress for changes
to statutes and regulations that would harmonize regulation of futures and
securities.
D. Strengthen Oversight of Systemically Important Payment, Clearing, and
Settlement Systems and Related Activities
We propose that the Federal Reserve have the responsibility and authority to
conduct oversight of systemically important payment, clearing and settlement
systems, and activities of financial firms.
E. Strengthen Settlement Capabilities and Liquidity Resources of Systemically
Important Payment, Clearing, and Settlement Systems
We propose that the Federal Reserve have authority to provide systemically
important payment, clearing, and settlement systems access to Reserve Bank
accounts, financial services, and the discount window.
III. PROTECT CONSUMERS AND INVESTORS FROM FINANCIAL ABUSE
A. Create a New Consumer Financial Protection Agency
1. We propose to create a single primary federal consumer protection supervisor
to protect consumers of credit, savings, payment, and other consumer
financial products and services, and to regulate providers of such products
and services.
2. The CFPA should have broad jurisdiction to protect consumers in consumer
financial products and services such as credit, savings, and payment products.
3. The CFPA should be an independent agency with stable, robust funding.
4. The CFPA should have sole rule-making authority for consumer financial
protection statutes, as well as the ability to fill gaps through rule-making.
5. The CFPA should have supervisory and enforcement authority and
jurisdiction over all persons covered by the statutes that it implements,
including both insured depositories and the range of other firms not
previously subject to comprehensive federal supervision, and it should work
with the Department of Justice to enforce the statutes under its jurisdiction in
federal court.
6. The CFPA should pursue measures to promote effective regulation, including
conducting periodic reviews of regulations, an outside advisory council, and
coordination with the Council.
7. The CFPA’s strong rules would serve as a floor, not a ceiling. The states
should have the ability to adopt and enforce stricter laws for institutions of all
types, regardless of charter, and to enforce federal law concurrently with
respect to institutions of all types, also regardless of charter.
8. The CFPA should coordinate enforcement efforts with the states.
9. The CFPA should have a wide variety of tools to enable it to perform its
functions effectively.
10. The Federal Trade Commission should also be given better tools and
additional resources to protect consumers.
B. Reform Consumer Protection
1. Transparency. We propose a new proactive approach to disclosure. The
CFPA will be authorized to require that all disclosures and other
communications with consumers be reasonable: balanced in their
presentation of benefits, and clear and conspicuous in their identification of
costs, penalties, and risks.
2. Simplicity. We propose that the regulator be authorized to define standards
for “plain vanilla” products that are simpler and have straightforward
pricing. The CFPA should be authorized to require all providers and
intermediaries to offer these products prominently, alongside whatever other
lawful products they choose to offer.
3. Fairness. Where efforts to improve transparency and simplicity prove
inadequate to prevent unfair treatment and abuse, we propose that the CFPA
be authorized to place tailored restrictions on product terms and provider
practices, if the benefits outweigh the costs. Moreover, we propose to
authorize the Agency to impose appropriate duties of care on financial
intermediaries.
4. Access. The Agency should enforce fair lending laws and the Community
Reinvestment Act and otherwise seek to ensure that underserved consumers
and communities have access to prudent financial services, lending, and
investment.
C. Strengthen Investor Protection
1. The SEC should be given expanded authority to promote transparency in
investor disclosures.
2. The SEC should be given new tools to increase fairness for investors by
establishing a fiduciary duty for broker-dealers offering investment advice
and harmonizing the regulation of investment advisers and broker-dealers.
3. Financial firms and public companies should be accountable to their clients
and investors by expanding protections for whistleblowers, expanding
sanctions available for enforcement, and requiring non-binding shareholder
votes on executive pay plans.
4. Under the leadership of the Financial Services Oversight Council, we propose
the establishment of a Financial Consumer Coordinating Council with a
broad membership of federal and state consumer protection agencies, and a
permanent role for the SEC’s Investor Advisory Committee.
5. Promote retirement security for all Americans by strengthening employmentbased
and private retirement plans and encouraging adequate savings.
IV. PROVIDE THE GOVERNMENT WITH THE TOOLS IT NEEDS TO MANAGE
FINANCIAL CRISES
A. Create a Resolution Regime for Failing BHCs, Including Tier 1 FHCs
We recommend the creation of a resolution regime to avoid the disorderly
resolution of failing BHCs, including Tier 1 FHCs, if a disorderly resolution
would have serious adverse effects on the financial system or the economy. The
regime would supplement (rather than replace) and be modeled on to the existing
resolution regime for insured depository institutions under the Federal Deposit
Insurance Act.
B. Amend the Federal Reserve’s Emergency Lending Authority
We will propose legislation to amend Section 13(3) of the Federal Reserve Act to
require the prior written approval of the Secretary of the Treasury for any
extensions of credit by the Federal Reserve to individuals, partnerships, or
corporations in “unusual and exigent circumstances.”
V. RAISE INTERNATIONAL REGULATORY STANDARDS AND IMPROVE
INTERNATIONAL COOPERATION
A. Strengthen the International Capital Framework
We recommend that the Basel Committee on Banking Supervision (BCBS)
continue to modify and improve Basel II by refining the risk weights applicable to
the trading book and securitized products, introducing a supplemental leverage
ratio, and improving the definition of capital by the end of 2009. We also urge
the BCBS to complete an in-depth review of the Basel II framework to mitigate its
procyclical effects.
B. Improve the Oversight of Global Financial Markets
We urge national authorities to promote the standardization and improved
oversight of credit derivative and other OTC derivative markets, in particular
through the use of central counterparties, along the lines of the G-20 commitment,
and to advance these goals through international coordination and cooperation.
C. Enhance Supervision of Internationally Active Financial Firms
We recommend that the Financial Stability Board (FSB) and national authorities
implement G-20 commitments to strengthen arrangements for international
cooperation on supervision of global financial firms through establishment and
continued operational development of supervisory colleges.
D. Reform Crisis Prevention and Management Authorities and Procedures
We recommend that the BCBS expedite its work to improve cross-border
resolution of global financial firms and develop recommendations by the end of
2009. We further urge national authorities to improve information-sharing
arrangements and implement the FSB principles for cross-border crisis
management.
E. Strengthen the Financial Stability Board
We recommend that the FSB complete its restructuring and institutionalize its
new mandate to promote global financial stability by September 2009.
F. Strengthen Prudential Regulations
We recommend that the BCBS take steps to improve liquidity risk management
standards for financial firms and that the FSB work with the Bank for
International Settlements (BIS) and standard setters to develop macroprudential
tools.
G. Expand the Scope of Regulation
1. Determine the appropriate Tier 1 FHC definition and application of
requirements for foreign financial firms.
2. We urge national authorities to implement by the end of 2009 the G-20
commitment to require hedge funds or their managers to register and disclose
appropriate information necessary to assess the systemic risk they pose
individually or collectively
H. Introduce Better Compensation Practices
In line with G-20 commitments, we urge each national authority to put guidelines
in place to align compensation with long-term shareholder value and to promote
compensation structures do not provide incentives for excessive risk taking. We
recommend that the BCBS expediently integrate the FSB principles on
compensation into its risk management guidance by the end of 2009.
I. Promote Stronger Standards in the Prudential Regulation, Money
Laundering/Terrorist Financing, and Tax Information Exchange Areas
1. We urge the FSB to expeditiously establish and coordinate peer reviews to
assess compliance and implementation of international regulatory standards,
with priority attention on the international cooperation elements of prudential
regulatory standards.
2. The United States will work to implement the updated International
Cooperation Review Group (ICRG) peer review process and work with
partners in the Financial Action Task Force (FATF) to address jurisdictions
not complying with international anti-money laundering/terrorist financing
(AML/CFT) standards.
J. Improve Accounting Standards
1. We recommend that the accounting standard setters clarify and make
consistent the application of fair value accounting standards, including the
impairment of financial instruments, by the end of 2009.
2. We recommend that the accounting standard setters improve accounting
standards for loan loss provisioning by the end of 2009 that would make it
more forward looking, as long as the transparency of financial statements is
not compromised.
3. We recommend that the accounting standard setters make substantial
progress by the end of 2009 toward development of a single set of high quality
global accounting standards.
K. Tighten Oversight of Credit Rating Agencies
We urge national authorities to enhance their regulatory regimes to effectively
oversee credit rating agencies (CRAs), consistent with international standards
and the G-20 Leaders’ recommendations.

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