The most sweeping financial reorganization plan since the 1930’s is expected to the unveiled this Wednesday and the Obama administration is preparing to slug it out with the nation’s largest banks. With so much money at stake, the proposed reforms will not pass without dogged resistance. The reorganization plan will touch on almost every aspect of banking from how exotic financial products are traded to how much interest banks can charge on the consumer’s credit card debts.
The outcome will shape how the financial industry operates in the future. There are competing interest from consumers, businesses, government agencies, and the banks. Each aspect needs to be tackled because it touches on various corners of the economy. Regulatory issues will likely dominate Washington in the next several months.
The “White Paper”
At the core of the proposal is what the administration calls the “white paper”. It is basically a plan to give the Federal Reserve more authority in overseeing the biggest players in the industry. The Fed wants more authority to breakup important institutions – similar to what FDIC does to failed companies. The government likewise intends to create a new regulator for financial products targeted to the consumers.
Some lawmakers have proposed a complete consolidation of authority to a single agency. But the Obama administration stops short of this, allowing several agencies to continue their work. In addition, the plan won’t limit the size and scope of the companies’ operations though it will make it harder for banks to become overleveraged that they pose a risk to the economy as a whole.
After President Obama detailed the plan, it will quickly go to Congress where legislations will be passed. Treasury Secretary Timothy Geithner is also expected to appear in the Senate and House panels. Among the issues he will need to answer include how regulators can create a process that won’t simply bailout large companies in trouble. Giving more authority to the Fed, given its secrecy and its failures in the past, will also be a thorny issue in Capitol Hill.
According to administration officials, the goal of this proposal is to minimize the level of danger large financing institutions pose to the economy. They envision a more stable market wherein banks are encouraged to take on fewer risks because of tougher liquidity, leverage, and capital requirements.
Complex hedge funds might also need to register with government authorities if they become large enough. Consumer products, especially mortgages, will be supervised by a new watchdog. More consumer-protection powers will be pushed by the Democrats in Congress. In line with this, they will also push for stricter conditions than what Obama wants on executive compensation.
Despite all its upsides for the consumers, the proposal won’t clear up the confusing jurisdiction of state and federal regulators. Critics have already said that banking institutions had shopped around for the friendliest regulator and that’s why systematic problems fell through the cracks.