Although the Bush administration has been criticized for its largely hands-off approach to the housing crisis, Treasury Secretary Henry Paulson can now take credit for having accomplished one of the most difficult feats in the financial services universe: getting people excited about bank regulation. While interest is usually limited to a wonky collection of lawyers, bankers, and economists, the issue leaped into the national spotlight over the weekend as details of Paulson's "Blueprint for Regulatory Reform" leaked into the national media. The proposal would attempt to modernize the financial services regulatory structure to meet the demands of today's complex financial ecosystem. Here's what you need to know about it:
What are the key changes Paulson has proposed?
Overhaul regulation: The current financial services regulatory structure is based on an inefficient patchwork of regulatory agencies. Paulson's "blueprint" includes a plan to create a more streamlined regime featuring these three distinct bodies:
Merge the SEC and the CFTC: Paulson calls for the Securities and Exchange Commission and the Commodity Futures Trading Commission to be brought together under one roof.
Create the Mortgage Origination Commission: The plan also includes a proposal to create a new commission to oversee—but not replace—the state-based regulatory structure of the mortgage origination industry. This new body—the Mortgage Origination Commission—would set standards for industry participants and rate each state's regulatory framework.
Federally charter insurance companies: In addition, the blueprint would rework the insurance regulatory structure by giving companies the option of a federal charter, just as banks have. Currently, insurance companies are regulated by the states in which they operate. Because laws vary from state to state, the structure can be burdensome.
Why is the plan being introduced now?
The Treasury Department began working on a plan to modernize the financial services regulatory structure about a year ago. The system—a patchwork of state and federal agencies—has long been criticized as bloated and inefficient. "Many banks are regulated by more than one [regulator], so they often get conflicting instructions about compliance," says Christopher Low, chief economist with FTN Financial. "So consolidation or simplification makes sense from that standpoint."
But the idea of modernizing the system has taken on new urgency as the credit crisis has intensified—especially after the Fed allowed investment banks to borrow from its discount window (formerly open only to commercial banks) shortly after the implosion of Bear Stearns, the fifth-largest U.S. investment bank. "That has brought [the issue of financial services regulatory modernization] to the forefront," says Brian Sack of Macroeconomic Advisers.