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US Financial Regulation Reform

April 8, 2010
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Under Obama, US is tackling the serious issues it inherited. The world economy, while in poor shape, has not caved, and signs of recovery are evident, pushed by stimuli, bailouts. And now, he has taken the health care issues ignored for decades.

One other significant area of development has been Financial Regulation Reform. Here are the key areas where US is focussing its strategy on: (a) Consumer protection - consolidating consumer-related oversight of credit cards, mortgages, debit and gift cards, deposit accounts ; applying consistent rules across sectors of the financial industry.

(b) Systemic-risk regulation would include a "financial services oversight council" that coordinates policy and identifies emerging risks, among other roles. The Federal Reserve would act as a "consolidated supervisor" for financial firms either big enough, or interconnected enough  , that their failure would pose a risk to the financial system as a whole .

(c) Banks as well as other financial firms would get tougher capital standards, meaning "more capital in the system, better capital in the system, less pro-cyclical capital in the system," .

(d) Hedge funds "and other private pools of capital" would have to register, while the biggest could see actual regulation.

(e) Institutions that securitize assets would have to keep 5% of the securitized risk .

(f) Ratings agencies would face tighter regulation, with more disclosure requirements and tougher rules "with respect to conflicts of interest" and ratings quality.

(g) All derivatives would face regulation, additional disclosure rules and tougher enforcement, as well as restrictions on selling them to "unsophisticated parties."

(h) Standardized derivatives would be traded on exchanges or cleared centrally in other ways, but over-the-counter derivatives would cause banks and other institutions to incur higher capital charges.

(i) The Securities and Exchange Commission and Commodity Futures Trading Commission would survive, but would be expected to harmonize futures and securities regulation.

(j) Also as previously announced, the administration is also seeking "tools to manage crises," including "resolution authority" allowing the government to seize, shut down and if necessary dismantle large financial holding companies in much the way they seize banking units now.

Hope the Europeans and Asians take the cue and initiate an earnest effort in this direction before it gets too late.


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