Obama's five-prong plan to oversee financial industry

The Federal Reserve would take on new responsibilities for monitoring risks, and a new agency would be created to enforce consumer safety in financial products.

Mark Lennihan/AP/File
Obama's plan would give regulators new "resolution authority" to take over large, troubled firms such as insurer AIG (whose offices in New York are shown here). This would enable the government to restructure such firms without the kind of full-scale bailout that AIG got last year.

President Obama is proposing a stem-to-stern overhaul of financial regulation in America, aimed at preventing a recurrence of the kind of credit-market collapse that engulfed the global economy last year.

The Obama administration says the time to enact this rule make-over is this year, even though officials are still busy with the more urgent tasks of damage control in the financial system. Top economic officials cite two reasons for the timing: to bolster the economy by restoring confidence in the financial system, and to pass needed reforms before political momentum withers away amid postcrisis relief.

Critics say the program, even if successfully implemented, isn’t enough to prevent future financial crises. Other analysts say the plan tackles most of the key gaps or weaknesses that opened the door to last year's financial crisis. Whether it goes far enough or not, the program would bring major changes to the way financial products are regulated.

Obama said the package would amount to the largest financial reforms since the 1930s. "Our goal," he said Wednesday, is "to restore markets in which we reward hard work and responsibility and innovation, not recklessness and greed."

The plan seeks to alter the regulatory environment on five fronts. It would:

• Strengthen oversight and fill gaps in regulation. One institution, the Federal Reserve, would become responsible for monitoring risks across various industries, with a new oversight panel looking over its shoulder. Banks would be required to hold more capital to ensure their soundness. The standards would be highest for the biggest and most complex firms. The pay incentives at banks – which have been blamed for encouraging risk – would be subject to new oversight. One new agency, a successor to the Treasury's Office of the Comptroller of the Currency (OCC), would replace the OCC and the Office of Thrift Supervision – so that banks and thrift institutions are regulated in the same manner.

• Oversee complex products known as derivatives, which fueled a binge of risky mortgage lending. Derivatives would be subject to new regulation and disclosure. Firms that create these products, including packages of mortgages and other loans, would have to retain a stake in them.

• Empower regulators with new “resolution authority” to take over large and interconnected firms when they get into trouble. This would give the government a framework for restructuring such firms, rather than facing what an administration official calls the "fool's choice" between a full-scale taxpayer bailout (as was provided for insurer AIG) and the system-threatening collapse of a major firm (as happened at Lehman Brothers).

• Create a new agency to regulate and enforce consumer safety in financial products, much as the Food and Drug Administration does in another realm of consumer products. The Securities and Exchange Commission would still oversee investment products, but Mr. Obama intends that the new agency would become a strong enforcer for mortgage lending, credit cards, and other banking products that have had weak or patchwork rules.

• Work with other nations for tighter and more synchronized global standards for firms that operate across borders. This would make it harder for risky financial products to flourish from a base in weakly regulated nations.

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