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Table
of
Contents
Introduction
#
Summary
of
Recommendations
#
I.
Promote
Robust
Supervision
and
Regulation
of
Financial
Firms
#
II.EstablishComprehensiveRegulation
of
Financial
Markets
#
III.ProtectConsumers
and
Investors
from
FinancialAbuse
#
IV.Provide
the
Government
with
the
Tools
it
Needsto
Manage
FinancialCrises
#
V.Raise
International
Regulatory
Standards
and
Improve
Interrlational
Cooperation
#
o
Introduction
Overthepast
twoyears
we
have
faced
themost
severefinancialcris:ssince
the
GreatDepression.Americansacross
the
nationarestruggling
with
unemp:oyment,failingbusinesses,falling
home
prices,anddecliningsavings.
These
challelges
have
forcedthegovernmenttotakeextraordinarymeasurestorevive
our
financial
S)
stem
sothat
peoplecan
accessloansto
buy
a
caror
home,
pay
fora
child's
education,
OI
financeabusiness.
The
roots
of
thiscrisisgo
back
decades.
Years
withoutaseriouseconomicrecessionbredcomplacency
among
financialintermediariesandinvestors.
Firancial
challengessuchas
the
near-failure
of
Long-TermCapital
Management
andthe
Asian
FinancialCrisis
hadminimal
impact
on
economicgrowth
in
the
U.S.,
which
bled
exaggeratedexpectationsabouttheresilience
of
our
financialmarkets
and
firms.Risingassetprices,particularly
in
housing,
hid
weak
creditunderwritingstandardsand
maskedthe
growingleveragethroughout
the
system.
Atsome
of
our
most
sophisticatedfinancialfirms,risk
management
;;ystemsdidnotkeep
pacewiththe
complexity
of
new
financialproducts.
The
lack
of
transparencyandstandards
in
marketsforsecuritizedloanshelpedto
weaken
underwr
tingstandards.
Market
discipline
brokedown
asinvestorsreliedexcessively
on
creditratingagencies.Compensationpracticesthroughout
the
financialservicesindustry
rewarded
short-termprofitsat
theexpense
of
long-termvalue.Households
saw
significantincreases
in
accesstocredit,
but
thosegains
were
overshadowed
by
pervasivefailures
inconsumer
protection,leavingmanyAmericans
with
obligationsthat
they
didnotunderstandandcould
not
afford.
1
 
Whilethiscrisishadmanycauses,itisclearnowthatthegovernmeltcouldhavedonemoretopreventmany
of
theseproblemsfromgrowingout
of
contrc1andthreateningthestability
of
ourfinancialsystem.Gapsandweaknessesinthesuperuisionandregulation
of
financialfirmspresentedchallengestoourgovernment'sability
t::>
monitor,prevent,oraddressrisksastheybuiltupinthesystem.Noregulatorsawits
job
asprotectingtheeconomyandfinancialsystemasawhole.Existingapproachesto
bmk
holdingcompanyregulationfocusedonprotectingthesubsidiarybank,notoncomprehensiveregulation
of
thewholefirm.Investmentbankswerepermittedtooptforadifferentregimeunderadifferentregulator,andindoingso,escapedadequateconstraintsonleverage.Otherfirms,suchasAIG,ownedinsureddepositories,butescapedthestridures
of
seriousholdingcompanyregulationbecausethedepositoriesthatthey
owmd
weretechnicallynot"banks"underrelevantlaw.Wemustactnowtorestoreconfidenceintheintegrity
of
ourfinanci
al
system.ThelastingeconomicdamagetoordinaryfamiliesandbusinessesisaCOlstantreminder
of
theurgentneedtoacttoreformourfinancialregulatorysystemandJutoureconomyontracktoasustainablerecovery.
We
mustbuildanewfoundation
fOl
financialregulationandsupervisionthatissimplerandmoreeffectivelyenforced,thatp:'otectsconsumersandinvestors,thatrewardsinnovationandthatisabletoadaptandevolvewithchangesinthefinancialmarket.Inthefollowingpages,weproposereformstomeetfivekeyobjecti"es:
(1)
Promoterobustsupervisionandregulationoffinancialfirms.
Financialinstitutionsthatarecriticaltomarketfunctioningshould
be
subjecttostrongov{:rsight.Nofinancialfirmthatposesasignificantrisktothefinancialsystemshould
be
unregulatedorweaklyregulated.Weneedclearaccountabilityinfinancialoversightandsupervision.Wepropose:AnewFinancialServicesOversightCouncil
of
prudentialregulatorstoidentifyemergingsystemicrisksandimproveinteragencycooperation.NewauthorityfortheFederalReservetosuperviseallfirmsthato)uldposeathreattofinancialstability,eventhosethatdonotownbanks.Strongercapitalandotherprudentialstandardsforallfinancialfinns,andevenhigherstandardsforlarge,interconnectedfirms.AnewNationalBankSupervisortosuperviseallfederallycharteredbanks.Elimination
of
thefederalthriftcharterandotherloopholesthatallowedsomedepositoryinstitutionstoavoidbankholdingcompanyregulation
by
theFederalReserve.Theregistration
of
advisers
of
allhedgefundsandotherprivatepools
of
capitalwiththeSEC.
(2)
Establishcomprehensivesupervisionandregulation
of
financialmarkets.
Ourmajorfinancialmarketsmust
be
strongenoughtowithstandbothsystem-widestressandthefailure
of
oneormorelargeinstitutions.
We
propose:Enhancedregulation
of
securitizationmarkets,includingnewrequlrementsformarket
2
 
transparency,strongerregulation
of
creditratingagencies,ardarequirementthatissuersandoriginatorsretainafinancialinterestinsecuritizedloans.Comprehensiveregulation
of
allover-the-counterderivatives.NewauthorityfortheFederalReservetooverseepayment,clearirg,andsettlementsystems.
(3)
Protectconsumersandinvestorsfromfinancialabuse.
Torebuildtrustinourmarkets,weneedstrongandconsistentregulationandsupervision
0:
consumerfinancialservicesandinvestmentmarkets.Weshouldbasethisoversightnotonspeculationorabstractmodels,butonactualdataabouthowpeoplemakefinancialdecisions.Wemustpromotetransparency,simplicity,fairness,accountability,andacces;.Wepropose:AnewConsumerFinancialProtectionAgencytoprotectconsumersacrossthefinancialsectorfromunfair,deceptive,andabusivepractices.Strongerregulationstoimprovethetransparency,fairness,andappropriateness
of
consumerandinvestorproductsandservices.Alevelplayingfieldandhigherstandardsforproviders
of
conSUlT.er
financialproductsandservices,whetherornottheyarepart
of
abank.
(4)
Improvetools
for
managingfinancialcrises.
We
needtobesun:thatthegovernmenthasthetoolsitneedstomanagecrises,
if
andwhentheyarise,sothatwearenotleftwithuntenablechoicesbetweenbailoutsandfinancialcollapse.Weprop,)se:Anewregimetoresolvenonbankfinancialinstitutionswhosefailnrecouldhaveserioussystemiceffects.RevisionstotheFederalReserve'semergencylendingauthority
tc
improveaccountability.
(5)
Raiseinternationalregulatorystandardsandimproveinternationalcooperation.
ThechallengeswefacearenotjustAmericanchallenges,theyareglobalchallenges.So,
as
weworktosethighregulatorystandardshereintheUnitedStates,wemustasktheworldtodothesame.
We
propose:Internationalreformstosupportoureffortsathome,includingstrmgtheningthecapitalframework;improvingoversight
of
globalfinancialmarkets;coordinatingsupervision
of
internationallyactivefirms;andenhancingcri5ismanagementtools.
In
additiontosubstantivereforms
of
theauthoritiesandpracticesoLegulationandsupervision,theproposalscontainedinthisreportentailasignifican1restructuring
of
ourregulatorysystem.
We
proposethecreation
of
aFinancialServicesOversightCouncil,chaired
by
Treasuryandincludingtheheads
of
theprincipalfederalfJ.nancialregulatorsasmembers.Wealsoproposethecreation
of
twonewagencies.Weproposethecreation
of
theConsumerFinancialProtectionAgency,whichwill
h ~
anindependententitydedicatedtoconsumerprotectionincredit,savings,and
p a y m l ~ n t s
markets.Wealsoproposethecreation
ofthe
NationalBankSupervisor,which
wi!
beasingleagencywithseparatestatusinTreasurywithresponsibilityforfederallychmtereddepositoryinstitutions.Topromotenationalcoordinationintheinsurancesector,weproposethecreation
of
anOffice
of
NationalInsurancewithinTreasury.
3
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