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There is universal agreement that the financial crisis has
exposed critical gaps and weaknesses in the United States'
financial regulatory system. As over-leveraging occurred, internal
risk management systems, rating agencies and regulators simply did
not understand the magnitude of the problem. These failures caused
a dramatic loss of confidence in U.S. financial institutions and
have contributed to and accelerated the global recession. While
many have tried to assign blame for the crisis, there is plenty of
blame to go around – both the public and private sectors
could have done more to prevent these problems from spiraling out
of control and threatening the stability of the overall
economy.
Battlelines: Public vs Private Sector
To respond to the crisis, President Obama outlined a five-part
framework to reform the U.S. financial system and address financial
markets. This regulatory framework briefly describes the first step
in what is expected to be a lengthy and contentious legislative
process between the House and Senate Committees in Congress,
regulatory agencies and the private sector all vying for power and
position in determining the ultimate structure of the new
regulatory regime. While the precise contours of any regulatory
reform effort will be months in the making, and some elements of
these reforms may not be adopted until 2010, it is clear at this
point that the fundamental trend is toward greater authority over
systemically critical entities, without regard to their status as
banks or bank holding companies. It is also likely that insurance
oversight, and potentially a federal charter, will be considered as
Congress seeks to reform the regulatory system.
Global Regulation: Harmonizing International Standards
The President's plan also seeks to strengthen global
financial markets by "harmonizing" international
regulatory standards by calling on the Basel Committee on Banking
Supervision to: (1) increase international capital requirements;
(2) increase oversight of financial products and the
over-the-counter derivatives market; and (3) monitor cross-border
investment flows and provide increased authority for Europe's
Financial Stability Board to supervise international financial
firms.
As this legislative and regulatory battle moves forward Holland
& Knight will send timely updates concerning developments with
a particular focus on the banking, insurance, private equity and
consumer markets.
Highlights Of The President's Plan To Regulate U.S. And
Global Financial And Capital Markets
The President's plan will:
Create a council of regulators called the Financial Services
Oversight Council to monitor risk across the financial system. The
council will be chaired by the Treasury secretary and include the
heads of existing federal financial regulatory agencies, including
the Federal Reserve and representatives of new regulators.
Establish a Consumer Financial Protection Agency (CFPA) to
protect consumers from deceptive practices by companies such as
credit card lenders and mortgage brokers.
Give new authority to the Federal Reserve to supervise firms
considered so big or influential – so-called Tier 1
Financial Holding Companies (FHCs) – that their failure
could have a systemic negative impact on the economy.
Create a system to finance, dismantle or resolve a troubled
firm. Once the Federal Reserve and the Treasury Department decide,
the Federal Deposit Insurance Corporation (FDIC) would step in with
minimal impact on investors.
Establish a national bank supervisor to regulate all
federally-chartered banks, thrifts and federal branches and
agencies of foreign banks. The Fed and FDIC would retain their
existing roles in supervising state-chartered banks.
Eliminate the Office of Thrift Supervisions by merging it with
the Office of the Comptroller of the Currency into a single
regulator and eliminating the federal thrift charter.
Treat Tier 1 Financial Holding Companies like bank holding
companies with respect to nonbanking activities, whether or not
they own banks.
Open up interstate branching by banks, notwithstanding state
laws to the contrary.
Retain the Securities and Exchange Commission and Commodity
Futures Trading Commission as separate entities and market
regulators. However, the SEC would no longer be responsible for or
have a role in supervising large holding companies, as it did in
monitoring Lehman Brothers and Bear Stearns. That role would be
turned over to the Federal Reserve. Additionally, CFTC's role
in regulating OTC derivatives would call for greater
regulation.
Give the SEC oversight of hedge funds and other private pools
of capital, including venture capital funds.
Increase capital requirements for bank holding companies and
Tier 1 Financial Holding Companies on a consolidated basis.
Require that certain participants in securitization
transactions retain a 5 percent stake in all asset-backed
securities transactions.
Require that shareholders get a non-binding vote on
compensation packages for financial executives.
Create an office of National Insurance within the Treasury
Department to review the regulation of insurance companies (now
done primarily by states), monitor the insurance industry and to
thereby create a federal entity to participate in international
negotiations regarding issues affecting U.S. insurers.
Support, through the Treasury Department, proposals to improve
insurance regulation, including increasing national uniformity
through either a federal charter or more harmonized laws among
states.
To obtain Holland & Knight's detailed summary of
President Obama's regulatory framework, which includes the
following core elements,click here.
Requiring Strong Supervision and Regulation of All Financial
Firms
Strengthening Consumer Protection With an Independent Agency
With Full Authority to Protect Consumers
Improving International Regulatory Standards and
Cooperation
Strengthening Regulation of Core Markets and Market
Infrastructure
Providing the Government With Tools to Effectively
Manage Financial Crises
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.