30 March 2009

US Treasury outlines framework for regulatory reform

Certain large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime, Geithner said. He also called for higher standards on capital and risk management for systemically important firms.

Treasury Secretary Geithner outlined the new rules for the US financial system focusing first on containing systemic risk.

 

Certain large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime, Geithner said in his testimony.

 

Addressing the first component of regulatory reform, Geithner outlined the role of a single independent regulator with responsibility over systemically important firms and capital payment and settlement systems.

 

This includes identifying systemically important firms under the characteristics of the financial system's interdependence with the firm, it’s size, leverage, and degree of reliance on short-term funding. Furthermore, analaysis should not be limited to banks or bank holding companies, but could include any financial institution that was deemed to be systemically important

 

He also called for higher standards on capital and risk management for systemically important firms.

 

Capital requirements for these firms must be more conservative and sufficiently robust to be effective in a wider range of deeply adverse economic scenarios. Supervisors will also need to impose liquidity, counterparty, and credit risk management requirements. The regulator of these entities will also need a prompt-corrective action regime that would allow the regulator to force protective actions as regulatory capital levels decline, similar to the powers of the FDIC with respect to its covered agencies.

 

Other items under the new approach focussing on systemic risks include:

Ø       Registration of all hedge funds advisors with assets under management above a moderate threshold;

Ø       A comprehesive framework of oversight, protections and disclosures for the OTC derivatives market; and

Ø       New requirements for money market funds to reduce the risk of rapid withdrawals.

 

Treasury Outlines Framework For Regulatory Reform

 

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