WASHINGTON — A plan announced Friday would give the U.S. Federal Reserve more authority to monitor financial markets and intervene when stability is threatened.
The Treasury Department is to introduce the detailed proposal Monday. It would need approval from Congress.
The summary plan avoids suggestions of increased regulation of financial markets and institutions. The proposal includes no new rules for hedging and risk swaps, which currently have little regulation.
The Securities and Exchange Commission would become less prominent, merged with the Commodity Futures Trading Commission. The Treasury Department suggests that stock exchanges should have more power to regulate themselves.
The department began work on plans to revise regulation last year, under orders from Treasury Secretary Henry Paulson Jr.
The report, which recommends more power for the Federal Reserve, also proposes combining the Office of Comptroller of the Currency — which dates back to the Civil War — and the Office of Thrift Supervision into a single banking overseer. In addition, the draft, which was circulated to government agencies this week and obtained by Bloomberg News, calls for the merging of the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The Securities Industry and Financial Markets Association, Wall Street’s biggest lobbying group, praised Paulson’s proposals.
The plans would replace a regulatory framework that was “born of Depression-era events and is not well-suited for today’s environment where billions of dollars race across the globe with a click of a mouse,” Sifma President Timothy Ryan said in a statement late yesterday.
The executive summary of Paulson’s draft report calls for legislation that creates “uniform minimum licensing qualification standards for state mortgage market participants.” The authority to draft mortgage regulations would remain at the Fed.
President’s Working Group
The report breaks down its proposals into short-, intermediate- and long-term recommendations. Under short-term suggestions, Treasury proposes turning the President’s Working Group on Financial Markets, which has advised the president since 1987, into a government-chartered “interagency body” to coordinate financial regulatory policy.
The group’s focus should be “broadened to include the entire financial sector, rather than solely financial markets,” the draft said. The President’s Working Group is chaired by the Treasury Secretary and includes the heads of the Fed, the SEC and the CFTC. The report recommends expanding the body to include the heads of the OCC, the FDIC, and the OTS.
Hal Scott, a professor at Harvard Law School who heads the Committee on Capital Markets Regulation, a group of executives and academics whose efforts Paulson has endorsed, said it will be “very hard” to implement any of the recommendations.
“The political reality is that the merits will get lost in the argument,” Scott said. “They recognize it won’t be done soon.”
The draft calls for the merger of the SEC, which regulates investment banks, securities and stock exchanges, and the CFTC, which oversees about $4.2 trillion of daily trades in products ranging from orange juice to foreign currencies.
Greater Fed Role
The study envisions the Fed with broader oversight powers, especially in the area of market stability, and possibly less powers for bank supervision. The study suggests that the FDIC could take on the role of supervising state-chartered banks.
In other areas, the Fed gathers more power. The study proposes that the Fed become a “market stability” regulator, with powers over insurance companies and securities firms with federal charters.
The study also suggests a distinction be made between the Fed’s “normal” lender-of-last resort discount window to help banks meet short-term funding needs and “market stability” lending to help stave off severe funding shortages and panics. In that function, the loans could be extended to federally chartered insurance companies and financial institutions, the study says.