Congress Debates Regulation; Treasury Urges Federal Insurance Option

July 10, 2008

Congress began debating financial regulatory reform today, with the Bush Administration advocating a dual federal and state regulatory system for insurance companies similar to the banking system as part of the reforms.

Treasury Secretary Henry M. Paulson Jr. told the House Committee on Financial Services that the current financial services “regulatory architecture and authorities are outdated and less than optimal.”

In March, Paulson laid out a Blueprint for a Modernized Financial Regulatory Structure, in which he proposed three primary regulators organized around objectives: one focused on market stability across the entire financial sector, another focused on safety and soundness of institutions supported by a federal guarantee, and a third focused on protecting consumers and investors.

“A major advantage of this structure is its timelessness and its flexibility and that, because it is organized by regulatory objective rather than by financial institution category, it can more easily respond and adapt to the ever-changing marketplace. If implemented, these recommendations eliminate regulatory competition that creates inefficiencies and can engender a race to the bottom,” Paulson told the House members.

The Treasury blueprint would retain state-level regulation of mortgage origination practices, but would create a new federal-level commission, the Mortgage Origination Commission, to establish minimum standards for personal conduct and disciplinary history, minimum educational requirements, testing criteria and procedures, and appropriate licensing revocation standards.

It also recommends the creation of an optional federal charter for insurance companies, similar to the current dual-chartering system for banking, and the phasing out of the thrift charter.

Originally, Paulson said his blueprint should be considered over time. But now he thinks reform should not be delayed.

“When we released the blueprint, I said that we were laying out a long-term vision that would not be implemented soon. Since then, the Bear Stearns episode and market turmoil more generally have placed in stark relief the outdated nature of our financial regulatory system, and has convinced me that we must move much more quickly to update our regulatory structure and improve both market oversight and market discipline,” he testified.

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