24 January 2008

US Key House lawmaker Frank says regulation needed to steady financial sector

House Financial Services Committee Chairman Barney Frank said today that recent market turmoil shows the need for increased regulation of the financial services sector, and vowed to pursue legislation to that end this year.

Speaking to reporters, the Massachusetts Democrat said the Democratic Congress would try to ensure financial regulations can 'catch up' to financial innovations, many of which led to the current crisis in the housing and credit markets.

'We are in the midst of an international financial crisis, the greatest single cause of which was irresponsible lending practices in the American mortgage market,' Frank said.

He said the center of the problem is that mortgage loans were securitized, which cut the link between the lender and the borrower, meaning borrowers now have much less interest in whether these loans would be repaid.

'The answer to that is not to do away with securitization,' Frank said. 'But regulation has to keep up with innovation.'

Frank outlined several possible ideas for dealing with this problem that his committee will take up this year, including finding ways to ensure bad loans are not made, and making lenders acknowledge these loans on their balance sheets. He also said new reserve requirements for banks and lenders may be required.

Frank said a mutual recognition agreement on accounting standards between the US and European Union would also help.

Regarding housing, he said his committee and the House Ways and Means Committee are looking to put forward legislation that would combine housing tax incentive programs and federal spending that supports housing in order to make it easier for developers to take advantage of these breaks.

© Forbes