Measures are being proposed by the US Congress to reform financial supervision. The blueprint for reform would strip the Federal Reserve of significant powers, create a single banking regulator, establish a special bankruptcy code to handle the collapse of too-big-to-fail non-banking firms and, promises "no more bailouts."
This may lead to granting new resolution authority to a single federal regulator or group of regulators, which would unwind the businesses of all so-called too-big-to-fail firms.
Such resolution authority would have presumably been used to handle the collapse of Lehman Brothers, Bear Stearns, AIG as well as Fannie Mae and Freddie Mac. It would apply to other investment-banks turned bank holding companies, such as Goldman Sachs, as well as traditional banking companies such as Citigroup and Bank of America.
A related proposal would create a single regulator for depository institutions by combining the Office of the Comptroller of the Currency and the Office of Thrift Supervision, as well as shift existing supervisory functions of the Federal Reserve and the FDIC to that agency. The new agency, for instance, would oversee bank holding companies, now in the Fed's portfolio.
The reason is to keep the Fed focused on their monetary policy responsibilities. There can be an inherent conflict between the monetary and regulatory-supervisory responsibilities.
Indeed, the central bank is one of the big losers in this plan. Not only would the Fed not get the systemic, or super regulator job, it would also be relieved of regulatory and supervisory responsibilities so it could focus on its monetary policy mandate.
Reallocating these duties will eliminate the Fed’s current incentive to prop up the economy through an accommodative monetary policy to prevent firms under its regulatory purview from failing.
The plan would also increase Fed transparency and accountability by making it subject to more audits by the General Accounting Office; mandating clear inflation targets; and limiting its emergency lending authority.
The plan would specifically eliminate the Fed's ability to use its authority to intervene on behalf of a specific institution and generally transfer the special lending facilities to the Treasury’s balance sheet after a certain period.
Though a hallmark of the Fed's success has been its independence, all members of Congress have questioned the extraordinary use of its massive balance sheet to stimulate the economy. The Fed's actions essentially challenge the spending authority granted to Congress under the Constitution.
Other major proposals include creation of a "Market Stability and Capital Adequacy Board", which would fulfill the role of the systemic regulator. The board would be chaired by the Secretary of the Treasury and comprised of outside experts as well as representatives from the financial regulatory agencies responsible for supervising large, complex firms.
The US move follows a worldwide trend of switching to a single-regulator model and taking over banking supervision authority from the central banks. Many countries have adopted this model, among them all Scandinavia, the UK, Germany, Japan and South Korea.
By Chodechai Suwanaporn [email protected]
Source: Fiscal Policy Office / www.fpo.go.th