Tuesday, May 26, 2009

U.S. Financial Regulations Need Overhaul, Panel Says

Posted on Bloomberg by Ian Katz:

U.S. financial regulations must be “entirely reorganized” by merging agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission, adding to the Federal Reserve’s powers and setting rules for derivatives, an industry group said.

The Committee on Capital Markets Regulation urged creating a Financial Services Authority to replace separate banking, securities and commodities regulators. The panel’s 57 recommendations also include raising capital rules for big banks to cut systemic risk and bringing hedge funds and credit-default swaps under regulatory oversight.

“Our regulatory structure must be entirely reorganized in order to become more integrated and efficient,” the group led by R. Glenn Hubbard, dean of the Columbia Business School, and John Thornton, chairman of the Brookings Institution and former president of Goldman Sachs Group Inc., said today in a report.

Congress is planning to overhaul rules after global firms reported more than $1.47 trillion of writedowns and credit losses since 2007, and the U.S. has committed more than $200 billion to prop up more financial firms. The panel said its proposals are “broadly similar” to recommendations made by the Bush administration and other groups since March 2008.

President Barack Obama is developing proposals that may strip powers from the SEC, according to people familiar with the plan. White House spokeswoman Jennifer Psaki declined to comment on the committee’s report. SEC spokesman John Nester declined to immediately comment on the recommendations.

‘Wiser Heads’

The panel “wants to remain relevant in a world where they are not,” Harvey Goldschmid, a former Democratic SEC commissioner, said in an interview. “Wiser heads are now at work. One hopes they will come up with the right answers, including preserving and enhancing the SEC.”

Before the collapse of credit markets, “we had too many cooks not knowing what the other cooks were doing,” Hal Scott, a Harvard Law School professor and director of the committee, told Bloomberg Television today. The panel’s objective is to ensure that regulators understand all financial risks, he said.

The committee recommended higher solvency standards for institutions with more than $250 billion in assets, “given the concentration of risks to the government and taxpayer.” Ten banks including JPMorgan Chase & Co. and PNC Financial Services Group Inc. exceeded the threshold as of March 31, Fed data showed.

Centralized Clearing

The committee also proposed greater centralized clearing for credit-default swaps and increased capital requirements for swaps that don’t go through a clearing system. JPMorgan, Goldman Sachs Group Inc., Credit Suisse Group AG and Barclays Plc sent the U.S. Treasury a plan, written in February, saying the Fed should extend bank regulation practices to companies and hedge funds, according to a document obtained by Bloomberg News and confirmed by the Treasury.

Corporations, energy companies and hedge funds don’t face capital and margin levels now, while banks do under central bank oversight.

On May 13, U.S. officials called for increased oversight in the $592 trillion unregulated market to reduce risk to the financial system. Derivatives such as credit-default swaps contributed to the failure last year of Lehman Brothers Holdings Inc. and a U.S. takeover of American International Group Inc., leading to the seizure of credit markets.

The Financial Services Authority would regulate all aspects of the industry, including safety and soundness, and might take the consumer and investor protection role from the SEC. The agency could be created in a merger of bank regulators including the Federal Deposit Insurance Corp., the SEC and the CFTC.

‘Woefully Ineffective’

“The crisis has shown that the most precarious sectors of our financial system are those already subject to a great deal of regulation -- regulation that has proved woefully ineffective,” the group said in its recommendation.

Hedge funds should be required to submit to regulators confidential reports “with information relevant to the assessment of systemic risk,” the committee said. The reports would include information addressing the fund’s liquidity needs, leverage and concentration of risk.

The panel said fair-value accounting should require companies to add disclosures that help investors distinguish between the market and credit information used to set values. Fair-value, known as mark-to-market, forces companies to value many securities each quarter based on market prices.

The Financial Accounting Standards Board last month eased the rule after banks including Citigroup Inc. and Wells Fargo & Co. said it didn’t work when markets are illiquid.

The committee is a nonpartisan group of 25 executives including Nasdaq OMX Group Inc. Chief Executive Officer Robert Greifeld, MFS Investment Management Chairman Robert Pozen and WL Ross & Co. Chairman Wilbur Ross, and academics such as Robert Glauber, visiting professor at Harvard Law School.

Daniel Doctoroff, president of Bloomberg LP, the parent company of Bloomberg News, is a committee member.

No comments: