What Obama's Financial Regulation Reform Announcement Means

The long-awaited Administration plan to reform financial regulation has arrived. The good news is that the specific proposals are virtually all sensible and constructive. The bad news is that there were some missed opportunities. On the whole, the good news significantly outweighs the bad -- we'll be better off if the proposals pass. The good will probably be watered down and some bad ideas may creep in as entrenched interests fight for changes as this goes through Congress, but the signs are good that we'll still get an improvement compared to the present set-up by the time we're done.

There are a lot of specifics, which you can read about in a longer paper of mine, (PDF) but the big points are threefold. First, the regulatory structure is being rejiggered to look more carefully at big risks to the system, both widespread problems and specific trouble at institutions large enough to be the domino that knocks the system over. A council of regulators is charged with coordinating on the systemwide issues, such as looking at the dangers caused by potential bubbles. More importantly, the Fed is being given considerably more authority over all of the financial institutions big enough to be that dreaded domino. The powers include the ability to step in earlier and more flexibly than they've legally been allowed to do. This will help a lot with situations like the one that developed at AIG, where their weak regulatory powers more or less forced the bailout in the form we saw.

Second, there will be a new Consumer Financial Protection Agency responsible for ensuring that mortgages, credit cards, and similar products are easier to understand and have fewer unfair or unsafe terms. Everyone agrees that this needs to be done better. Having a new agency with very substantial powers, as proposed, will put greater focus on this issue and will probably be more effective than trying to ramp up the effort on consumer protection at the existing regulators. However, the devil is in the details, which will change as the bill goes through Congress and as the new regulator finds its sea-legs.

Third, all financial institutions will face tougher capital requirements. Capital represents the assets of a financial institution that are not promised to creditors, depositors, or anyone but the owners. So, capital is the margin for error to cover mistakes and bad luck, which we have seen can be a real problem in this industry. More capital means safer banks and other financial institutions. It also means somewhat higher costs for loans and lower rates for deposits, but the cost is relatively modest compared to the additional protection we clearly need.

The biggest piece of bad news may sound technical, but it does matter. We have an insane regulatory structure with six different regulators of banks, and this is counting the state regulators as one body. No one would design a system this way, we just stumbled into it. The original Administration inclination was to consolidate down to one or two bank regulators. Instead, we're going to be stuck with five instead of six. They could have done better. This matters because the more regulators there are the easier it is for something to slip between the cracks and the easier it is for banks to shop around for the most lenient regulations.

Still, the plan as a whole is sensible and should help. Hopefully it will stay largely intact as it goes through Congress.

Comments

[AnonymousBanker]

Regulators: Our Nation's Ball-less Wonders! The Fed is on the top of that list.
http://anonymousbanker.com/?p=234

In light of Obama's new Financial Regulatory Reform Plan, I feel the need to reiterate my comments on our financial industry's regulators, which I refer to as our Nation's Ball-less Wonders. In this article I explain how our laws are converted to regulations and the responsibility of our regulators to protect our country by actually enforcing these regulations.

The debate should not be over whether the Fed should become the mega-regulator, but rather whether the Fed has, in the past, performed its job to protect this country and our economy by actually enforcing the regulations that exist.

When we evaluate the benefits of a mega-regulator, I would say that any consolidation that reduces expenses and thereby saves taxpayer dollars, is a good plan. That being said, the Fed has failed us miserably in the past and I have no reason to believe that they will perform any better in the future.

My fear is that transferring this authority to one agency only dilutes the systems of checks and balances and reduces the possibility that some agency, any agency, will cry foul and take action when the financial companies fail to follow our laws. Perhaps the plan might work, if, in addition to the consolidation, the people were also represented by an ombudsman to act as watchdog when the Fed fails to do its job, as it surely will.

[raketaka]

ok I had to post this quotation by Thomas Jefferson:
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
HA!
Anybody agrees with me?

[nomorefed]

Every other country, especially China and most of Europe have goverment incentives to protect it's industries. No matter what you call it it's a form of protectionism and its inevitable. We should stop being naive and take care of our own house. The only ones who win if we don't are the multinational corporations who don't care where they get their hand out.

recommended reading: http://www.bit.ly/12NCJR

[nomorefed]

Take back the trillions of $$$ given to the banks, who just sit on it and make it totally ineffective then start government incentive to create realistic industries that give employment and generate real productive income, some of which would hopefully be from exports.

Every other country, especially China and most of Europe have goverment incentives to protect it's industries. No matter what you call it it's a form of protectionism and its inevitable. We should stop being naive and take care of our own house. The only ones who win if we don't are the multinational corporations who don't care where they get their hand out.

recommended reading: http://www.bit.ly/12NCJR

Every other country, especially China and most of Europe have goverment incentives to protect it's industries. No matter what you call it it's a form of protectionism and its inevitable. We should stop being naive and take care of our own house. The only ones who win if we don't are the multinational corporations who don't care where they get their hand out.

[watchTVgetSTUPID]

Business as usual. Apparently Obama was reading a script written by Geithner and Summers. The lie that Summers inserted was the laws put in place during the Great Depression could not protect the economy from the modernized banking system. The truth is Summers was the one who actively pushed to eliminate FDR's Glass Stiegal Act that did protect us for decades.

Now they are trying to eliminate the Savings and Loan Associations. Why? Because they are very solevant and have their own Deposit Insurance Funds. Geithner is afraid when Banks continue to fail and the FDIC runs out of money later this year, depositors will transfer their accounts to S&Ls and Credit Unions.

Obama is trying to cut off all escape routes the working people have to protect their money from the coming Wall Street financial panic.

[americaforme]

Nothing in your post about (USURY) Banks and 31% interest rates. Like the catapillar in Alice and wonderland, blows smoke rings....Who are you? Nothing in you post about caps on interest rates like a need to be 10%. Same old crap from the White House. Financials are Alice in wonderland just about as crazy.