Treasury department's proposed overhaul of the financial regulatory structure: a look at the blueprint and a look ahead.(Report)

Abstract

Purpose--The purpose of this paper is to summarize and provide commentary on the US Department of Treasury's Blueprint for a Modernized Financial Regulatory Structure, issued on March 31, 2008.

Design/methodology/approach--The paper summarizes and comments on the short-, intermediate-, and long-term recommendations laid out in the Blueprint. The short-term recommendations are to modernize the President's Working Group on Financial Markets, principally by broadening its focus to include the entire financial sector, to address gaps in mortgage origination oversight, principally though creating a federal Mortgage Origination Commission; and to enhance the Federal Reserve Board's current temporary liquidity provisioning process. The Treasury's intermediate-term recommendations are intended to modernize the regulatory structure and to eliminate duplication. They are to phase out and transition the thrift charter to the national banking charter; to merge the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC); to establish a uniform, comprehensive regulatory system for, and create a federal charter for, "systemically important" payment and settlement systems; and to create an optional federal charter for insurers. The Blueprint 's long-term optimal regulatory structure envisions an "objectives-based" regulatory approach in which three primary regulators would be established to focus individually on market stability regulation, prudential financial regulation and business conduct, three types of charters for financial institutions: federal insured depository institutions, federal insurance institutions, and federal financial services providers; the Federal Reserve Board assuming the role of market stability regulator; a prudential federal regulatory agency to regulate financial institutions with some type of explicit government guarantee associated with their business operations; and a conduct-of-business regulatory agency to regulate the business conduct of aft financial institutions. In addition to the three objectives-based regulators, the Blueprint recommends establishing two other regulatory entities: a federal insurance guarantee corporation and a corporate finance regulator.

Findings--The Blueprint finds that substantial regulatory reform is necessary to respond to significant developments including globalization of the capital markets, innovative and sophisticated new financial products and trading strategies, growing institutionalization of the capital markets, and convergence of financial service providers and financial products. Among the areas where one may see action and debate in the near future are: broadening the scope and membership of the President's Working Group on Capital Markets, adoption of uniform minimum licensing standards and the creation of a mortgage origination commission, further discussion of the terms and conditions attached to non-depository institutions' access to the Federal Reserve discount window, continuing debate around the possible merger of the SEC and the CFTC, and updating by the SEC of the self-regulatory organization (SRO) rule-making process.

Originality/value--The paper is a clear and concise summary with commentary from expert securities lawyers.

Keywords United States of America, Capital markets, Regulation, Financial management

Paper type Technical paper

**********

On March 31, 2008, the US Department of Treasury ("Treasury"), as part of its efforts to improve the competitiveness of the US capital markets, issued its Blueprint for a Modernized Financial Regulatory Structure (Blueprint) [1]. A year earlier, in the wake of various reports regarding the competitive position of the US capital markets [2], Treasury hosted a conference on March 13, 2007, to focus on capital markets competitiveness [3]. Treasury announced in June 2007 that it was working on a blueprint for regulatory reform [4], and sought comment in October 2007 on a broad range of questions relating to the existing regulatory structure for financial institutions and how it might be reshaped [5], The solicitation of public comment stated that "it is important to continue to evaluate our regulatory structure and consider ways to improve efficiency, reduce overlap, strengthen consumer and investor protection, and ensure that financial institutions have the ability to adapt to evolving market dynamics" [6].

Over the course of the past year, debate has continued regarding the relative position of the US markets in the global context of financial markets and what, if anything, should be done to bolster US competitiveness. The Blueprint concludes that substantial regulatory reform is necessary to respond to significant developments including globalization of the capital markets, innovative and sophisticated new financial products and trading strategies, growing institutionalization of the capital markets, and convergence of financial services providers and financial products.

Against this background, the Blueprint lays out short-, intermediate-, and long-term recommendations--the last in the form of a conceptual model for an "optimal" regulatory framework for modifying the current US financial services regulatory structure. Secretary Paulson has emphasized that the first priority of the regulators, the Administration, and Congress should be to remedy the current market situation and the mortgage crisis, and that the Blueprints recommendations should not be implemented until those issues have been sufficiently addressed [7].

We summarize and provide commentary on the Blueprint in the following.

I. The Blueprints short-term recommendations

A. Modernize the President's working group on financial markets

The President's Working Group on Financial Markets (PWG), created by executive order following the stock market decline of 1987, is an interagency coordinator for financial market regulation. The PWG's current members are the respective heads of Treasury, the Board of Governors of the Federal Reserve System (FRB), the Securities and Exchange Commission ("SEC"), and the Commodity Futures Trading Commission (CFTC). The Blueprint recommends expanding the PWG's scope, membership, and authority, and improving its efforts at interagency coordination and communication. Specifically, the Blueprint recommends:

* Broadening the PWG's focus to include the entire financial sector, not just financial markets, and expanding its membership to include the heads of the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS). The Blueprint also recommends clarifying that the PWG has the authority to engage in consultation efforts with other domestic and international regulatory and supervisory bodies.

* Improving the PWG's facilitation of interagency coordination and communication in: a) mitigating systemic risk to the financial system; b) enhancing financial market integrity; c) promoting consumer and investor protection; and d) supporting capital …