President Barack Obama laid out the administration’s plan for a new financial regulatory landscape on Wednesday. Obama says it is clear now that the government could have done more to prevent the current financial crisis from spiraling out of control and threatening the overall economy. He says his proposal is intended to modernize and protect the integrity of the nation’s financial system.
The president’s reforms would expand the Federal Reserve’s authority, giving the agency primary responsibility for evaluating risks to the national system as a whole and averting any future crises. The Fed’s focus would be on core banks and markets. It would maintain direct oversight of the country’s largest bank holding companies, and would also be charged with direct supervision of non-bank financial companies of similar size or complexity.
Obama’s 85-page proposal would allow the Treasury Department to seize control of any large financial institution at risk of collapse, and give the FDIC special resolution powers to dismantle the organization. Officials expect this type of broadened authority to head off economic turmoil like the markets experienced with the failures of Bear Stearns and Lehman Brothers last year, as well as eliminate the need for controversial federal bailouts in the future.
In a statement praising Obama’s regulatory proposal, FDIC Chairman Sheila Bair said of primary importance is addressing the concept of too big to fail. “Market participants should understand that large institutions can and will fail and that an effective resolution mechanism will be uniformly applied to institutions in a fair, transparent and consistent manner,” Bair said.
The administration has decided not to consolidate regulators as previously alluded to, primarily due to the politics involved. Instead, the president wants to implement rule changes to curb “jurisdiction-shopping” by institutions. He also plans to transfer some agencies’ existing powers – in particular, oversight of mortgages, credit cards, payment markets, and other consumer debt – to a new regulator, which he is calling the Consumer Financial Protection Agency.
One regulator that would be completely eliminated, however, is the Office of Thrift Supervision (OTS), whose powers would be melded into the Office of the Comptroller of the Currency (OCC). Obama said he also wants to create a council of financial regulators to improve coordination between the different agencies.

In addition, his plan would impose higher capital requirements, especially for the largest banks. It would also require institutions packaging and selling mortgage-backed securities (MBS) to retain at least five percent of the loans on their own books. Hedge funds and private equity companies would be required to register with the Securities and Exchange Commission (SEC) and make their finances available to regulators. And credit ratings agencies would have to abide by new conflict of interest rules.
The president also wants to build on the new compensation rules recently announced by the Treasury Department for institutions receiving federal aid. Obama’s proposal would institute say-on-pay legislation, giving shareholders of any company the power to approve or revoke annual compensation packages of top executives.
According to White House officials, the roots of today’s financial crisis can be traced back to decades ago. They argue that rising asset prices, particularly in housing, hid weak credit underwriting standards and masked the growing leverage of the U.S. banking system. They said lack of transparency and regulation in the secondary market also led to lower underwriting standards, and free-flowing credit in the past overshadowed failures in consumer protections. In addition, officials said, risk management systems at some of the nation’s most sophisticated firms did not keep pace with the complexity of new financial products, while compensation structures across industries rewarded short-term profits at the expense of long-term value.
The Mortgage Bankers Association (MBA) called President Obama’s plan a “comprehensive proposal that provides a good launching point for the coming debate.” John A. Courson, MBA’s president and CEO, added that his organization will work to ensure the new structure does not stifle innovation or increase costs for consumers, and will continue to lobby lawmakers to institute one preemptive set of mortgage regulations throughout the country to replace the existing patchwork of state and local laws.
Some economists have expressed concern over the tighter regulations, saying that just as American banks are re-establishing their health and gaining back investor confidence, the administration’s efforts could create an uneven playing field within the financial sector. Multiple media outlets have reported that foreign companies are beginning to eyeball Wall Street firms and other domestic financial powerhouses, seeing the country’s economic troubles as the perfect opportunity to pick up American market share.
Critics of stricter regulations argue that non-U.S. companies will have a competitive advantage because of new constraints imposed by the government’s reform. However, the administration says it plans to coordinate efforts with other nations to prevent enterprises from migrating to less-regulated territories.