Obama Announces Broad Regulatory Reform Proposals

President Obama on Wednesday presented a plan for regulatory reforms that would consolidate banking regulators, create new government agencies and give new powers to the Federal Reserve.

One proposal of particular interest to the accounting profession includes three recommendations addressed to accounting standard setters. The plan echoes the Group of 20’s London pronouncements by recommending that accounting standard setters:

• clarify and make consistent the application of fair value accounting standards, including the impairment of financial instruments, by the end of 2009
• improve accounting standards for loan loss provisioning by the end of 2009 that would make the loan loss provisioning more forward looking, as long as the transparency of financial statements is not compromised and
• make substantial progress by the end of 2009 toward development of a single set of high quality global accounting standards.

The details of the plan were revealed in an 89-page Treasury Department report titled Financial Regulatory Reform: A New Foundation. The proposals are organized under five major objectives that correspond to the five key problems that Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers wrote about in an op-ed piece in Monday’s Washington Post.

The first objective, to “promote robust supervision and regulation of financial firms,” is supported by specific proposals that include creation of two new agencies and elimination of federal thrift charters.

A new national bank supervisor would regulate all federally chartered depository institutions and all federal branches and agencies of foreign banks. A separate financial services oversight council of regulators wouldbe chaired by the Secretary of the Treasury and composed of the heads of the Federal Reserve, the proposed National Bank Supervisor, the proposed Consumer Financial Protection Agency,the SEC, the CFTC, FDIC and the Federal Housing Finance Agency (FHFA). The council, which would identify problems and refer them to the appropriate regulatory agencies, would be supported by a permanent, full-time staff at the Treasury Department.

The Federal Reserve would be given new powers to regulate “any financial firm whose combination of size, leverage and interconnectedness could pose a threat to financial stability if it failed…regardless of whether the firm owns an insured depository institution.”

Additional proposals include stronger capital requirements for all financial firms and the registration of hedge fund advisers with the SEC.

The second objective, to “establish comprehensive regulation of financial markets,” provides a series of recommendations for regulators to close loopholes, require better disclosures and report back to Congress if they need new statutory powers.

One recommendation calls for comprehensive regulation of all over-the-counter (OTC) derivatives, including credit default swaps. Responsibility for regulation of the OTC market would apparently be split between the CFTC and SEC, “consistent with their respective missions.” The document also calls for the CFTC and SEC to make recommendations to Congress for changes to statutes and regulations that would harmonize regulation of futures and securities.

Notably, under the third objective, to “protect consumers and investors from financial abuse,” is a proposal to create a new Consumer Financial Protection Agency. The new independent regulatory agency would have broad jurisdiction, including rule-making and enforcement powers, to protect users of consumer financial products and services such as credit, savings and payment products.

To meet the fourth objective, to “provide the government with the tools it needs to manage financial crises,” the plan calls for creation of a special process called a resolution regime under which the Treasury could take control of failing bank holding companies to minimize the negative impact of the companies’ failure on the financial system. The process would supplement and be modeled after the existing resolution regime for insured depository institutions under the Federal Deposit Insurance Act.

In addition the plan calls for Section 13(3) of the Federal Reserve Act to be amended to

require the prior written approval of the Secretary of the Treasury for any extensions of credit by the Federal Reserve to individuals, partnerships or corporations in “unusual and exigent circumstances.”

The plan’s fifth and final objective, to “raise international regulatory standards and improve international cooperation,” includes an array of proposals from strengthening the Basel II framework to tightening oversight of credit rating agencies and includes recommendations for improvements to accounting standards.

—Matthew G. Lamoreaux is a JofA senior editor. His e-mail address is mlamoreaux@aicpa.org.