Financial Update (Second Quarter 2008)

Proposals Would Broaden Fed's Supervision of Financial Markets

Treasury Secretary Henry Paulson In late March, U.S. Treasury Secretary Henry Paulson proposed a far-ranging overhaul of how the nation's financial markets are regulated. These proposed changes would position the Federal Reserve as a "market stability regulator" that would be given broad oversight authority over all aspects of the financial services industry. According to the proposal, the changes would allow the Fed to collect and evaluate information across the financial system, from small banks to large hedge funds, whose practices have a role in the stability of the financial system.

Current regulatory system needs updating, secretary says
Paulson said Treasury's proposal is an attempt to modernize the financial services regulatory structure to meet the complexity of today's marketplace. "The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability," Paulson said.

"We should and can have a structure that is designed for the world we live in," he added. "One that is more flexible, one that can better adapt to change, one that will allow it to more effectively deal with inevitable market disruptions, and one that will better protect investors and consumers."

Speech by Secretary Paulson on regulatory reform off-site image
Remarks by Secretary Paulson to the U.S. Chamber of Commerce off-site image
Summary of proposed regulatory changes off-site image

Fed's role would include market stabilization
Treasury's proposals feature three distinct oversight bodies:

  • Market stability regulator. This responsibility would become the domain of the Federal Reserve, providing the organization with the authority to evaluate capital, liquidity, and margin practices across the entire financial system;
  • Prudential financial regulator. Treasury's plan envisions one regulatory body for banks, which are currently overseen by five different agencies; and
  • Conduct of business regulator. Paulson's proposals include having a dedicated agency whose purpose is protecting consumers and investors. This new agency would impose consistency where overlapping requirements from various agencies now exist, Paulson said.

Idea took shape before current market turbulence
Paulson said planning for an overhaul of financial regulation began about a year ago, before U.S. financial markets encountered their current turbulence. However, he added that any changes should not be implemented during a time of market turmoil. "These long-term ideas require thoughtful discussion and will not be resolved this month or even this year," he said. "Once we are through this period of market stress we need to begin the serious work of modernizing and reforming the structure, which will require a great deal of discussion and many years to complete."

April 25, 2008