President Obama announced his long-awaited proposals for the overhaul of the regulatory system for the financial services sector. There were no real surprises as the administration has been seeking input from many different parties for months and surrogates have be floating specific proposals over the last couple weeks. The so-called White Paper (www.financialstability.org) that outlines the administration’s thinking is pretty stark in places: “it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system.” (Page 2).
It’s clear that the main thrust of the regulatory reform is around systemic risk and consumer protection. Addressing the systemic risk issue, the Administration is proposing a Financial Services Oversight Council. What’s interesting here is that they scrapped the alternative of consolidating such power in a single agency, e.g. the Federal Reserve. Other proposals to address systemic risk include the creation of a category called Tier 1 FHC which the Fed will oversee, a revision of capital requirements for Tier 1 FHCs, a new Federal Bank Supervisor to conduct prudential supervision of other banks, the regulation of investment banks by the Fed, and other proposals. On consumer protection, the Administration is proposing a new Consumer Financial Protection Agency.
What is utterly lacking in these proposals is any sort of programmatic approach to intra-company risk management. There’s a brief mention of this issue:
“Prudential standards for Tier 1 FHCs—including capital, liquidity, and risk management standards—should be stricter and more conservative than those applicable to other financial firms to account for the greater risks that their potential failure would impose on the financial systems.”
How companies will react to these “stricter standards” remains to be seen. But as taxpayers holding a large stake in several of these Tier 1 FHCs, we should all want greater transparency into the control environment, decision-making process around risk management issues, and the organizational structure around risk management. These proposals do not address those issues.