More pieces of President Barack Obama’s major financial reform package are coming together as the U.S. Treasury Department rolls out a fourth legislative prong of the administration’s plan. The latest proposal would create a new body, the Financial Services Oversight Council, which would focus its energies on so-called “Tier 1” financial holding companies.
These Tier 1 firms would be subject to stronger oversight, higher capitalization standards and a requirement to have a rapid resolution plan in case they become a threat to the economic health of the nation. The legislation would also:
- strengthen firewalls between banks and their affiliates to prevent conflicts of interest and the spread of insolvency;
- impose new risk retention minimum standards — 5 percent — in the securitization market, and require institutions to issue standardized contracts;
- strengthen oversight of clearing and payment settlement organizations; and
- abolish loopholes in the bank regulatory system to block “regulatory arbitrage.”
The proposal, which Treasury delivered to Capitol Hill July 22, follows earlier legislative texts submitted to lawmakers — yet to be introduced as bills — that would (1) authorize the Securities and Exchange Commission (SEC) to harmonize rules governing investment advisers and broker-dealers; (2) empower corporate compensation committees to better align executive pay and corporate risk-taking; and (3) create a consumer financial protection agency.
The proposed 8-member Financial Services Oversight Council was at the heart of the administration’s latest incursion on Capitol Hill. The envisioned council’s chief mission would be to mount an unprecedented regulatory regime designed to watch for and mitigate damage from any systemic threat to the economy taking the form of a Tier 1 financial holding company. Tier 1 firms would be defined by statutory language embedded in a raft of legislative documents that Treasury delivered to lawmakers, by amending the Bank Holding Company Act of 1956.
The proposed oversight council, to be chaired by the Treasury Secretary, would give a key role to the Federal Reserve chairman and marshal the forces of six other discrete agencies, two of which do not yet exist, all of which would be authorized to share information with each other. The agencies — existing and proposed — are:
- SEC;
- Federal Deposit Insurance Corporation
- Commodity Futures Trading Commission;
- Federal Housing Finance Agency;
- Consumer Financial Protection Agency (proposed); and
- National Banking Supervisor (proposed).
