Treasury Secretary Henry Paulson announced a proposal for sweeping overhaul of financial regulatory systems in the country.
These proposals would expand the oversight of the Federal Reserve while eliminating or merging several existing agencies and taking over the role of the states in some areas.
The so called Paulson plan wouldn’t increase overall regulation of the financial markets, however it would give the Executive Branch additional power to administer existing rules. Its scope would include not only banks, investment banks, mortgage lenders, and hedge funds but also insurance companies.
In this new proposal, the Federal Reserve would be designated a “market stability regulator” and therefore would have the power to examine the books of any financial institution that might potentially destabilize the nation’s financial systems. In addition, it would eliminate the Fed’s direct oversight of banks, turning that responsibility over to a new agency.
In addition it is likely that the Securities and Exchange Commission would ultimately disappear or be merged with the Commodities Futures Trading Commission, since many of the institutions the Fed would be monitoring are currently regulated by it. Furthermore, the proposal directly states that the Office of Thrift Supervision would be eliminated, with its current function as regulator of the nation’s savings and loans merged into the Comptroller of the Currency which already supervises national banks. To determine whether the Federal Reserve or the Federal Deposit Insurance Company would have federal oversight over state-chartered banks a study will be done.
On top of this, the plan calls for the creation of a Mortgage Origination Commission which would evaluate the supervision of mortgage lending in each state. The intention of this would be to give states an incentive to improve their regulation so that investors would not avoid mortgages originated in their states.
As the plan initially has been expounded on, many are calling the Paulson plan potentially the greatest reorganization of the regulatory system since the Great Depression. So there is no doubt that there will be much mulling of the details over the next 12 months. Ultimately, it is unlikely that much progress will be made on implementing any of its proposals until after the election and until a new administration takes office. The initial response to the bill has been mixed, so time will tell what this bill will ultimately look like when it does going into effect.