The U.S. Treasury is expected to propose within days the creation of a “systemic risk regulator,” probably the Federal Reserve, to oversee banking and market problems that could threaten the economy.
On both sides of the Atlantic, “tunnel vision” is out, and the “big picture” is in when it comes to financial regulation which is the next frontier for policy-makers beginning to look beyond rescuing the financial system and toward fixing it.
Some U.S. and EU regulators want to revamp the oversight apparatus so the financial system never again falls to pieces with no clear view in government of the foundations crumbling.
That was the sense Monday after a 20-nation meeting of finance ministers near London, where British Prime Minister Gordon Brown predicted “massive change” in oversight.
The U.S. Treasury is expected to seek not only a stronger Federal Reserve, but tougher capital standards for banks and better derivative market clearing and settlement mechanisms.
Proposals for better consumer protection and more aggressive oversight of hedge funds and credit rating agencies are anticipated, as are new ways to unwind big companies whose outright failure could do wide-scale economic damage.
The Treasury was unlikely to make proposals on all these topics in one legislative package, congressional aides said.
At least one key Democratic U.S. lawmaker was skeptical. Pennsylvania Democratic Rep. Paul Kanjorski, chairman of the House capital markets subcommittee, said he is puzzled by what the administration means by “systemic risk regulator.”
“Systemic risk is a conclusion after the fact … If you open up an office of systemic risk regulator, it would seem to me it would be a person that would have to be charged with the authority to examine everything,” he said.
He said it was “possible” that the Fed could take on some sort of systemic risk duties.
“But first the chairman would have to put on his Santa Claus uniform,” he remarked.
Treasury Secretary Timothy Geithner said last week he planned to roll out “a set of relatively detailed concrete proposals” before testifying on regulatory reform to a U.S. House committee on March 26.
Whether U.S. and EU efforts to form systemic risk regulatory agencies will result in assertive new financial watchdogs, or in toothless wonders, remains to be seen.
The road ahead for reform will be long, as governments are still preoccupied with stabilizing wobbly banks, getting the credit markets moving again, and reviving their economies.
Banks and financiers are already pushing back against some proposed changes, marshaling impressive armies of lobbyists and calling on deeply entrenched political allies for help.
But powerful financial interests were sounding a largely supportive note, so far, on the systemic risk question.
“Solving the systemic risk crisis does not require a vast new bureaucracy or radical restructuring of our regulatory system,” said David Sampson, president of the Property Casualty Insurers Association of America, an insurer lobbying group.
“It does require plugging the loopholes and refocusing the existing system … that in hindsight was clearly too limited,” Sampson said in a statement before hearings in U.S. Congress this week focused on the issue.
Many of Treasury’s initiatives closely resemble an agenda for regulatory reform discussed earlier this month by Massachusetts Democratic Rep. Barney Frank, chairman of the House Financial Services Committee.
Frank said then that he and other lawmakers have agreed with the Obama administration to get “conceptual agreement” on regulatory reform before the April 2 meeting in Britain of the leaders of the Group of 20 developed and emerging nations.
The G20 finance ministers meeting over the past weekend was a run-up to the April summit. Afterward, U.S. Treasury spokesman Andrew Williams said the department was already on an “aggressive path” to regulatory reform before the meeting.
He said the administration is working closely with congressional leaders on the issue, including Frank.
Fed Chairman Ben Bernanke suggested in a speech last year that a “macro-prudential” regulator might be a useful way to broaden regulators’ field of vision.
In Europe, former Bank of France Governor, Jacques de Larosiere, headed a high-level committee that recommended in February that the EU should set up a European Systemic Risk Council chaired by the European Central Bank.
The European Commission, the EU’s executive body, has welcomed de Larosiere’s recommendation and will make proposals to EU leaders in June on how to set up the council.
(Additional reporting by Mark Felsenthal in Washington and Huw Jones in London; Editing by Jan Paschal)