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Tuesday, January 12, 2010

Financial Regulatory Reform and the 111thCongress

Edward V. Murphy 
Specialist in Financial Economics 

Baird Webel 
Specialist in Financial Economics 

Gary Shorter 
Specialist in Financial Economics 

Andrew Hanna 
Presidential Management Fellow

Financial regulatory reform is being discussed in the 111th Congress, in a policy debate that began before the September 2008 financial disruption. For example, Treasury issued a blueprint for financial reform in March 2008. In September 2008, after this blueprint was issued but before congressional action, the financial system suffered severe distress as Lehman Brothers and AIG failed. This financial panic accelerated the review of financial regulation and refocused some of the policy debate on areas that experienced the most distress. 

Following the change of Administrations, the Treasury issued a new plan for reform in June 2009. House committees initially reviewed many related bills on an issue-by-issue basis. House Financial Services Committee Chairman Barney Frank then consolidated a number of proposals into a comprehensive bill, the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), which the House passed on December 11, 2009. H.R. 4173 as passed contains elements of H.R. 1728, H.R. 2571, H.R. 2609, H.R. 3126, H.R. 3269, H.R. 3817, H.R. 3818, H.R. 3890, and H.R. 3996. Senate Banking, Housing, and Urban Affairs Committee Chairman Christopher Dodd has issued a committee print, the Restoring American Financial Stability Act of 2009. 

One issue in financial reform is the potential reorganization of the financial system regulatory architecture. Currently, the United States has many regulators, some with overlapping jurisdictions, but with gaps in oversight of some issues. This structure evolved largely in reaction to past financial crises, with new agencies and rules created to address the perceived causes of the particular financial problems at that time. One option would be to consolidate agencies that appear to have similar missions. For example, the five regulators with bank examination authority could be merged or the two regulators with securities and derivatives oversight could be merged. Another option would be to remove regulatory authority on a particular topic from the multiple agencies that might address it within their area now, and establish a single agency to address that issue. For instance, a single consumer financial protection agency or a single systemic risk regulator could be created. Both the House and the Senate are considering the establishment of a single consumer financial protection agency and some consolidation of bank regulators, although details differ. Neither the House nor the Senate proposals would consolidate the securities and derivatives regulators or create a single systemic risk regulator. 

Other issues of financial reform address a particular sector of the financial system or selected classes of market participants. For example, both the House and the Senate proposals would require more derivatives to be cleared through a regulated exchange and require additional reporting for derivatives that would remain in the over-the-counter market. There are several proposals to try to increase the amount of information available to regulators, investors, consumers, and financial institutions. For instance, hedge funds would have increased reporting and registration requirements. Credit rating agencies would have to disclose additional information concerning their methodologies and any potential conflicts of interest. A federal office would be created to collect insurance information. Institution-level regulatory agencies would have to share information about covered firms with systemic risk regulators. Proposed executive compensation and securitization reforms would try to reduce incentives to take excessive risks. 

This report reviews issues related to financial regulation. It provides brief descriptions of comprehensive reform bills in the 111th Congress that address these issues. This report will be periodically updated to reflect congressional activity in financial regulatory reform.

Date of Report: December 30, 2009
Number of Pages: 19
Order Number: R40975
Price: $29.95

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