U.S. Treasury Secretary Henry M. Paulson’s sweeping new proposal to overhaul financial regulation is nothing if not complicated. Initial response to the plan, which targets a major structural shift of securities regulation and promises ramifications for U.S. and global finance alike, was scattered. Markets loved it, but some policymakers balked. Some analysts said it was too broad to have a concrete short-term impact on the credit crisis—Paulson himself acknowledged the measures could take “several years” to implement. But others defended the comprehensive reconsideration of the U.S. financial system, saying it is exceedingly well-timed given the urgency of the moment.
Paulson’s proposals, developed by Treasury officials in consultation with industry leaders and policymakers, call for a quick and broad expansion of the Federal Reserve’s powers, allowing the central bank to conduct on-site examinations of any investment bank that receives emergency Fed funding. A little further out, Paulson wants to close down the U.S. Office of Thrift Supervision, which oversees savings and loan operations, and fold it into a broader bank oversight board, the Office of the Comptroller of the Currency. He also proposes merging the Securities and Exchange Commission (SEC), which regulates securities markets, with the Commodity Futures Trading Commission (CFTC), which oversees some futures and options markets. In the long term, Paulson proposes to offer all financial institutions a federal charter, simplifying the current system in which some banks are chartered by states and others by the federal government. A Wall Street Journal graphic lays all this out in a one-page summary of the proposals.
As for what the plan would mean for the future of finance, analysts remain sharply divided. In a new interview, Benn Steil, CFR senior fellow and director of international economics, says the plan should be understood as part of a long-term push for financial reform that predates the current credit crisis. Since the establishment of stricter U.S. corporate governance standards following a slew of accounting scandals in the early 2000s, the global financial-services sector has experienced a broad reshuffling, with flows in many cases running away from the United States. If Paulson’s proposals eventually pass through Congress, Steil says, they could shift U.S. regulatory standards toward a more flexible model, akin to Britain’s, where accounting firms are bound to uphold conceptual frameworks rather than concrete lists of rules. This, he says, could shift the dynamics of global financial operations and potentially bring some business back to New York and other U.S. financial hubs.
In the short term, however, experts see potential problems with some of the proposals. Willem Buiter, a professor at the London School of Economics, blogs for the Financial Times that the framework for expanding Fed authority is a “recipe for increasing financial instability” because it only gives the Fed additional oversight power when markets are in crisis—i.e. not when financial institutions are actually buying bad securities, but when they’ve already bought them. As recent market turmoil has bluntly reiterated, such turmoil would bring consequences for global markets, not just those in the United States. The Wall Street Journal notes that small banks and state officials have been particularly critical of the deal, which they see as consolidating power with federal authorities. And even when experts tend to agree that a reform is beneficial, they add that implementation could be difficult. Steil points out, for example, that merging the SEC and CFTC makes sense, but says “the devil is in the details” given their starkly different regulatory philosophies. Either way, experts expect a long fight ahead. Most agree that passing regulation will be nearly impossible until a new administration takes office (WashPost).