A consensus is emerging between senior US lawmakers and financial market advocates on the sweeping plan put forth last week by US Treasury Secretary Hank Paulson to overhaul US financial regulation.
In an interview with Emerging Markets this weekend, House Financial Services Committee chairman Barney Frank (D., Mass.), strongly backed the proposed changes, while calling for more clarity on the plan’s details. “I agree with the broad thrust of [Secretary] Paulson’s proposals, although I disagree with some of the specifics,” he said.
“Having a risk regulator is paramount and that’s the bottom line of the proposal. The fact is we need a risk regulator with broader powers of regulation over the investment banks. “The Fed needs to be the risk regulator.”
Frank had previously stressed in an interview with Emerging Markets his longstanding efforts to increase oversight of the financial services industry. “In 2005, some of us in the Congress wanted to [apply more stringent regulation] but the Republican leadership at the time embraced a kind of free market fundamentalism and killed this effort.”
Frank added that the initiative will not be completed this year, given the time it will take to go through Congress. But the regulatory blueprint represents “a repudiation of the view that we don’t need to extend regulatory authority”.
He added: “The fact is that regulation has to be reshaped to keep up with innovation. We’ve moved beyond talk of whether or not to move into the area. The last two or three months have shown that. We’re beyond that now.”
The highlights of Paulson’s reform blueprint are: sweeping new supervisory powers for the US Federal Reserve Board; closing of the Office of Thrift Supervision; creation of federally chartered insurance companies; and a merger of the Securities and Exchange Commission and the Commodities Futures Trading Commission.
They are being watched closely by financial markets that are also measuring the potential fallout from the weakening US economy for the rest of the world, including Latin America.
Frank added that while broadly supportive of the proposal, he disagree with some specifics: “They go too far in doing away with state authorities,” he said.
But he added that Paulson’s proposals draw heavily from work undertaken by Congress and the Senate over recent months. “This is what we’ve been working on for some time now. It’s a another step in the right direction but it’s only one part of a broader discussion.”
“We’re not even going to have hearings on this until next year,” Frank said. “Right now we’re focused on dealing with subprime crisis.”
Merrill Lynch CEO John Thain said this week that he backs the proposed reforms. “It’s a very good blueprint to start from. Although it may be a long march, we begin it in the right direction.”
Charles Dallara, managing director of the Institute of International Finance, a global association of financial groups, agreed that Paulson’s proposal is “a step in the right direction.”
“It shows a recognition of the dysfunctional nature of the US financial regulatory system today,” he said last night.
Dallara’s comments came as the IIF’s 375 members from among the world’s most important banks, prepare to release their own report next week on the root causes of, and remedies for, the credit crunch.
The report is expected to expand on previous admissions of culpability by leading banks, and set out measures for how institutions will work to prevent any repeat of the present crisis.
These views also follow new data this week showing the US has suffered its biggest job loss in five years, piling further pressure on a beleaguered economy.
“There is no time for policy-makers anywhere to feel complacent,” Randall Kroszner, a governor of the US Federal Reserve, said in Miami.