One, Singular Regulation

Members of Congress and others are increasingly talking about forming a single, systemic risk regulator for the financial markets, in hopes that it will be one singular sensation by viewing systemic risk holistically instead of under the current, largely piecemeal approach of functional regulation by type of entity (i.e., commercial banks, investment banks, insurance companies, corporate entities, futures and commodities firms, etc.). Whether the systemic risk regulator would be an expanded version of the Fed (envisioned under Treasury’s regulatory blueprint released earlier this year) or a new agency is something that will be debated.

Agencies have not waited for formal restructuring to increase lines of communication, as evidenced this year by SEC’s MOU with the Fed, SEC’s Mutual Cooperation Agreement with the CFTC, and SEC’s MOU with the DOL.

However, concern with the causes of the credit crisis experienced over the past year-plus, and further concern with the potential effectiveness of the $700 billion rescue package signed into law in October are prompting further discussions about the potential need for a systemic risk regulator.

Here are some recent cites on this topic:

“Schumer Outlines Regulatory Reform Plan, Calls for Contemplating Single Regulator,” by Stephen Joyce in today’s BNA Daily Report for Executives. Joyce reports that Sen. Charles Schumer (D-NY) told a SIFMA conference yesterday: “The financial difficulties faced by the American International Group Inc. highlight the need for the U.S. government to contemplate adopting a single regulator for its financial services industry.” Schumer reportedly added, “We need to look closely at unifying and simplifying our regulatory structure, perhaps moving toward a single regulator. In this era of global markets and global actors, we cannot return to the older model of separate businesses with separate regulators. We must consider whether a more unified financial regulatory system could provide more efficient regulation.” BNA’s Joyce also noted the idea of a single national regulator for financial services is opposed by many state insurance and banking regulators.

“Treasury Plan Likely Starting Point For Dealing With Regulatory Reform,” by Joyce E. Cutler in today’s BNA Daily Report for Executives. Reporting from the American Bankers Association Annual Meeting, Cutler noted: “The current financial crisis undoubtedly will result in a new regulatory structure, with the Treasury Department's reform plan a likely roadmap, Public Company Accounting Oversight Board Chairman Mark Olson and Office of Thrift Supervision Director John M. Reich Jr., said Nov. 10.”

Statement of Sen. Chris Dodd, Chairman of Senate Banking Committee, Nov. 6, 2008: Senator Dodd confirmed his intention to stay on as chairman of the Senate Banking Committee, and described various priorities of the committee. Among those priorities, Dodd noted: “the primary legislative focus of the Committee must and will be to modernize our nation’s framework of financial regulation. If we are going to regain the confidence of investors, consumers, and businesses here at home and around the world, they must have confidence that our financial institutions are properly capitalized, regulated, and supervised.”

“Democrats Prepared to Act Fast on Car Aid, Regulation,” by Damian Paletta, Josh Mitchell, and Neal Boudette, Wall Street Journal, Nov. 6, notes: “House Financial Services Chairman Barney Frank said in an interview that he is weighing tougher rules on shareholder rights and stricter conditions on the $700 billion financial rescue package. Mr. Frank added that a central point of Democrats' plans would be the creation of a ‘systemic-risk regulator.’ It could have unprecedented powers over a wide range of financial institutions, from insurance firms to hedge funds, with responsibility for protecting the soundness of the whole financial system, not just one sector. He likened that to the establishment of the Securities and Exchange Commission, charged with maintaining fair markets and investor protection, five years after the market crash of 1929.”

WSJ’s Paletta, Mitchell and Boudette add: “Beyond the possible creation of a systemic-risk regulator, lawmakers are considering consolidation of some financial regulators. This will likely depend on the views of the Obama administration. One possible scenario would be merging the Office of the Comptroller of the Currency, which regulates national banks, and the Office of Thrift Supervision, which regulates savings and loans… SEC Chairman Christopher Cox, who is expected to leave by February, has pushed for his agency to be merged with the Commodity Futures Trading Commission. Such a move could make it easier for lawmakers to set tougher limits on complex financial products such as credit-default swaps, which are under much more scrutiny amid the financial turmoil.”

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