Regulatory Restructuring

Editor's Notes

1. Harper’s Index, copyright 2009, All Rights Reserved.
2. Note- not necessarily the FDIC.
3. Issue here is whether this is the first step towards eliminating the state bank charter.
4. Would regulate products such as credit cards and mortgages. It would enforce measures such as Truth in Lending Act and the Real Estate Settlement and Procedures Act. The FPSC would function much like the Consumer Product Safety Commission, a watchdog agency created in 1972 to protect consumers from unsafe products.  The idea behind the legislation [i ] is that when applying for a credit card or obtaining a loan, consumers should not have to understand the intricate details, just as they do not need to understand how a toaster works; the Commission would protect consumers from risky financial products by, among other matters, alleviating the need for them to understand the fine print in financial instruments and disclosures.  In many ways, the bill reflects an attempt to create overarching standards of consumer fairness across the existing series of discrete laws that apply to different products and services.  A key question will be how these new standards would be integrated into the existing regulatory framework applicable to the many industries to which it would apply. If enacted, the proposed legislation will dramatically affect the consumer finance industry.  The FPSC would have authority to heavily regulate financial products and services, and violations of its rules could result in criminal liability. 
5. The proposal also calls for strengthening the regulation of credit rating agencies.  Credit rating agencies would be required to have robust policies and procedures that manage and disclose conflicts of interest, differentiate between structured and other products, and otherwise promote the integrity of the ratings process.  Regulators would also be required to reduce their reliance on credit ratings in regulations and supervisory practices.  Such a change would impact net capital rules for broker-dealers, risk-based capital requirements for banks, eligibility requirements for securities that can be owned by money market mutual funds, and eligibility to register certain debt securities using a shelf registration statement.  To the extent risk-based regulatory capital rules would continue to rely on credit ratings, those rules would account for the risk of structured credit products, including the concentrated systematic risk of senior tranches and re-securitizations and the risk of exposures held in highly leveraged off-balance sheet vehicles.  These changes would be closely tied to the proposed increases in regulatory capital requirements on highly rated ABS.
6. The proposal’s treatment of the insurance industry is paradoxical.  It laments the weaknesses of regulating insurance at the state level and indicates a strong preference for federal regulation of insurance, but it fails to call for an end to state regulation in whole or in part.  Instead, it proposes to create the ONI within Treasury, which would have the power to gather information, identify weaknesses, and coordinate policy throughout the insurance industry.  The ONI would also have the power to negotiate international agreements and “speak with one voice” on behalf of the U.S. insurance industry.