The push to remake the financial industry’s rules of the road in hopes of softening future boom-and-bust cycles gathered momentum this week with Treasury Secretary Timothy Geithner urging Congress Thursday to create new systems to monitor and control risks.

So far in the financial crisis, Washington has acted mainly to contain the immediate damage to the economy. But any deeper fixes could also yield results quickly.

By signaling a receptivity to increased regulation – a key European demand – the announcement might strengthen President Obama’s ability to nudge Germany and other nations on a US priority at next week’s meeting of the Group of 20 leaders: expanding government spending as an economic stimulus.

Federal agencies would also have new authority to intervene at large, troubled financial institutions like AIG if parts of Mr. Geithner’s plan are enacted into law.

Longer term, clarifying potential reforms could lift economic confidence.

“It is important, because, let’s face it, we got into this because of regulatory issues,” says David Wyss, chief economist at Standard & Poor’s in New York. “It’s not going to be easy.”

Among the controversial points that Congress will wrestle with: What body should be empowered to be the watchdog of major risks to the financial system?

One leading candidate for the job is the Federal Reserve. But the Fed already has the major mission of setting monetary policy – and being a so-called lender of last resort in financial crises. Also, the Fed is coming in for its share of criticism in Congress lately for some of its actions during the crisis.

An alternative is to set up a new entity to do the job. Either way, this new role would come on top of – not as a replacement for – other agencies overseeing parts of the financial industry.

Geithner’s goals

Appearing before the House Financial Services Committee on Thursday, Mr. Geithner outlined key goals for regulatory reform.

“The system proved too unstable and fragile, subject to significant crises every few years, periodic booms in real-estate markets and in credit, followed by busts,” Geithner said. “These failures have caused a great loss of confidence in … a system that over time has been a tremendous asset for the American economy.”

He outlined four broad areas reforms will cover. They include protecting consumers and investors, eliminating gaps in the regulatory structure, and enhancing the coordination of rules in a more global economy.

Systemic risk

The fourth area of reform, addressing “systemic risk,” was his focus Thursday. He proposed:

•Naming a single entity to track systemic stability across all sectors of financial activity.

•Creating a resolution mechanism for important nonbank firms, so that they can be assisted or shut down, if needed, outside of traditional bankruptcy.

•Tightening the capital requirements for large financial firms so that they would rein in cyclical tendencies. During a boom, firms would have to set aside more reserves, as a way to curb excesses and provide a cushion for bad times.

•Requiring large hedge funds and other private-investment funds to register with the Securities and Exchange Commission (SEC) and be more transparent to regulators regarding their leverage – or borrowing – and risk.

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