Proposed Reforms (Part 3)

December 22, 2009

Consolidation of bank regulators – Currently, there are four major bank regulators: Office of the Comptroller of the Currency (OCC), Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS). We think it is most likely that the OCC and OTS are merged into a new National Bank Supervisor (NBS), but more aggressive consolidation is also possible. Senator Christopher Dodd’s has recently proposed combining all four and stripping the Fed and FDIC of their regulatory functions. In addition, there are proposals to merge other agencies involved in the regulation of financial markets, including the Security and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Also, non-federally regulated financial institutions (such as AIG and Countrywide) were prime contributors to the financial crisis. Bringing these financial institutions under the scrutiny of the federal regulatory umbrella is likely to be part of the consolidation.

Systemic risk regulator – The gaps in the patchwork of financial industry regulators contributed to the series of failures that led to the financial crisis. The Obama administration’s proposal to grant enhanced authority to the Fed to oversee overall financial system risk appears to be losing favor to the idea of creating a Financial Services Oversight Council to make recommendations on preventing systemic risk. This is very likely to get passed in some form.

Other measures include requiring hedge funds to register with the SEC, restructuring Fannie Mae and Freddie Mac, increasing SEC regulation of the credit rating agencies and even considering changing their business model.