The Financial Services Committee held a hearing to address the need for broad regulatory restructuring and reform for the financial markets, including financial institution oversight and regulation, systemic risk, and housing finance.
House Financial Services Committee held a hearing to address the need for broad regulatory restructuring and reform for the financial markets, including financial institution oversight and regulation, systemic risk, and housing finance.
The hearing focused on a possible review of the US regulatory system and stricter rules governing risky financial products that are seen as responsible for the current financial crisis. It's likely to involve the creation of a special committee to draft the upcoming regulatory overhaul, Committee Chairman Barney Frank said.
Inaugurating the hearing, Congressman Paul Kanjorski underlined that the current regulatory regime has failed. “Deregulation - along with the twin notions that markets solve everything while government solves nothing - should be viewed as ideological relics of a bygone era”, he said.
Also, Congresswoman Mike Capuano underlined that existing regulations are “not sufficient to address the reality of today’s financial services industry” and asked “how much additional regulation is necessary to provide the transparency and oversight that has been so clearly lacking.”
Finally, Congresswoman Speier wondered whether the SEC could be transformed into something capable of protecting investors from overly-risky financial products. “The blame cannot be laid solely at the feet of deregulation, but that is certainly a good place to start”, he said. “The lack of enforcement at the SEC would be laughable if it were not cost Americans so dearly.”
In particular, the hearing focused on:
Current state of the financial regulatory system, both in the United States and abroad, and ways to measure and limit risk without stifling innovations while improving market liquidity and breadth.
- The implications of current governmental lending and support facilities for the regulatory structure.
- Proposals to improve the regulatory structure to restore confidence in financial markets and institutions through a stronger system of regulation and oversight.
- The need for enhanced capital and reserve requirements for financial firms.
- The adequacy of current powers and coverage of the existing regulatory structure.
Prepared statements:
Alice Rivlin, the former budget director for the Clinton administration, was sceptical about the bailout package. “We are still in damage control mode”, she said. “We don’t yet know whether these enormous efforts will be successful in averting a meltdown.”
More or less regulation is not the question, Rivlin said criticizing that past attempts to rethink regulation have been derailed by ideologues. We need smarter regulation, she underlined. The bubble and the crash were exacerbated by clear regulatory lapses, perverse incentives, and instances where regulated entities - and even the Federal Reserve - were being asked to pursue conflicting objectives at the same time, Rivlin said.
Next to the regulation on mortgages, another obvious regulatory gap surrounds complex derivatives. However, it is nonsense to blame the complexity of products, she said. “Too many people failed to asked … what will happen to the value of these mortgage-backed securities when housing prices stop rising and begin to fall? They didn’t ask because they were profiting hugely from the collective delusion and did not want to hear the answers.”
Rivlin said she was in favour of imposing higher capital requirements on all financial institutions that have any claim on federal help if they are in danger of failing, and also to improve the transparency of derivatives. “But I doubt it would be useful to screen classes of derivatives before allowing their sale”, she said. “Charging a regulator with the task of weighing the risk-spreading value of a class of complex derivatives against the risk posed by the complexity itself strikes me as too hard to pull off.”
Joseph Stiglitz, professor at Columbia University, said that the rescue package was a massive blood transfusion to a patient who is haemorrhaging from internal bleeding - but we are doing almost nothing to stop that internal bleeding."
"Our financial institutions have failed us, with the predictable and predicted consequences," he said. "Part of the reason is inadequate regulations and regulatory structures. We can, we must do better, much better than we have in the past."
“Financial markets are not an end in themselves but a means: they are supposed to perform certain vital functions which enable the real economy to be more productive, Stiglitz said and criticized that “in America, and some other countries, financial markets have not performed these functions well”
Stiglitz heavily criticised the lack of regulation, transparency and competition in the financial sector. “One problem is that we had regulators that did not believe in regulation”, he said.
Regulators should encourage the move to standardized products, he said. Greater reliance on standardized products rather than tailor-made products may increase transparency and the efficiency of the economy, Stiglitz said.
He warned not to abandon mark-to-market accounting. “Not using mark-to-market not only provides opportunities for gaming, but it also provides incentives for excessive risk taking”, he said. Also, regulating incentives is essential, he underlined. “The current system encourages excessive risk taking, a focus on the short term, and bad accounting practices.”
He also called for mortgage originators to retain at least a 20% equity share. Rating agencies need to be more highly regulated, he said and called for a government rating agency.
With regard to the institutional setup, Stiglitz demands a reform of the regulatory structures and calls for a financial markets stability commission, having oversight of the entire financial system and providing integrated regulation of each of the parts of the system. This would include a Financial Products Safety Commission which would assess the risks of particular products and determine their suitability for particular users.
Joel Seligman, President of the University of Rochester strongly recommended Congress to create a Select Committee similar to that employed after September 11th to provide a focused and less contentious review of what should be done.
“This is a time when it is important that all appropriate alternatives be considered, including consolidating regulatory agencies, creating new regulatory agencies and transferring jurisdiction”, he said. The scope of any systematic review of financial regulation should be comprehensive. “This not only means that obvious areas of omission today such as credit default swaps and hedge funds need to be part of the analysis, but it also means, for example, our historic system of state insurance regulation should be re-examined.”
However, there is no clear answer towards a single regulator. The appropriate balance between the need for a single agency to address systemic risk and the advantages of expert specialized agencies has to be carefully investigated.
The message of many industry witnesses was clear: expanded regulation is needed, but perhaps not in all financial institutions.
Steve Bartlett, President Financial Services Roundtable blamed the regulatory system that “was not able to recognize fundamental changes in national and international financial markets and to adapt to those changes in a coordinated fashion.”
He proposed five reforms including giving the Federal Reserve Board overarching supervisory authority over systemically significant financial services firms, and greater cooperation and coordination among all financial regulators.
“Additional actions are needed by the SEC and the PCAOB to provide auditors the flexibility in the application of fair value accounting”, he said.
“The banking industry is, of course, already highly regulated”, Edward Yingling, President and chief executive of ABA, said stressing that the biggest failures of the current regulatory system have not been in the regulated banking system, but in the unregulated or weakly regulated sectors.
“It is clear we need a systemic regulator that looks across the economy and identifies problems”, Yingling said. “The systemic regulator would need broad access to information. It may well make sense to have that same regulator have necessary powers, alone or in conjunction with the Treasury, and a set of tools to address major systemic problems.”
However, he also expressed concerns about proposals to make the Federal Reserve a sort of super-regulator of the financial system. “This function would go beyond looking at systemic issues to regulating financial institutions on a daily basis”, he warned.
Another hole in the regulatory scheme is the lack of comparable standards for non-banks that participate in the payments system, Yingling said and underlined that “all banks and non-bank entities providing significant payment services should be subject to similar standards.”
On the mark-to-market accounting Yingling underlined that this “is simply incompatible with the banking system”. Banks must not have their loans and investments marked to prices set in panicked markets, he said.
Tim Ryan, SIFMA, called for an overall “financial markets stability regulator” with powers to put systemically important financial firms into receivership in the same way that the Federal Deposit Insurance Corporation does with banks.
The regulator should also have the power to set capital requirements for parent companies, but only to ‘recommend’ capital requirements for subsidiary companies. The regulator would oversee systemically important “banks, broker-dealers, insurance companies, hedge funds, private equity funds and others”, Ryan said. “In short, its powers could correspond to those that the Federal Reserve has as the umbrella adviser of bank holding companies.”
Congress website
Webcast of the hearing
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