U.S. Senator Susan Collins, Ranking Member of the Senate Homeland Security and Governmental Affairs Committee, who earlier this week introduced The Financial System Stabilization and Reform Act (FSSRA) of 2009, which would fundamentally restructure the nation’s financial regulatory system to strengthen oversight and accountability, issued the following statement in response to the Administration’s financial regulatory plan:
“It is clear that financial regulatory reform is essential to restoring public confidence in our markets and to strengthen our ailing economy. While many details have yet to be released, the White House’s goal of creating of a ‘systemic-risk regulator’ appears to be similar to my legislation. The Financial Stability Council that my legislation would establish would be charged with identifying financial products and activities that could pose a risk to the entire financial system and taking action to prevent or mitigate their impact – before they harm our nation’s economy.
“Our financial system must have a new, effective and transparent regulatory system that meets the needs of a modern economy. It is a positive step that the White House recognizes the need for financial regulatory reform and I look forward to working closely with my colleagues and the Administration on this issue.”
Earlier this week, Senator Collins introduced the Financial System Stabilization and Reform Act of 2009. A companion version was introduced in the U.S. House of Representatives by Congressman Mike Castle (R-DE).
The legislation would create a Financial Stability Council (FSC) to serve as a “systemic-risk regulator,” to maintain comprehensive oversight of potential systemic risks to the financial system. It would have the ability to propose changes to regulatory policy, working with existing federal regulatory agencies, when systemic risk could emerge due to regulatory gaps or risky new financial products. The FSC would also have the authority to close regulatory “black holes” that pose a systemic risk when risky products or activities fall outside the current authority of federal financial regulators. The FSC would also have the authority to adopt rules on financial institutions to prevent the “too big to fail” problem, such as imposing different capital requirements, raising risk premiums, or requiring these institutions to hold a larger percentage of their debt be held as long-term debt.
Additional provisions of Senator Collins’s bill include:
• Closing the credit default swaps loophole to ensure oversight of a financial instrument that contributed heavily to the current financial crisis and the downfall of AIG. This regulatory gap allowed systemic risk to build in our financial system without the oversight and transparency needed to prevent a collapse;
• Imposing safety and soundness requirements on new investment banks. Under the current system, investment bank firms such as the Bear Stearns and Lehman Brothers were left unregulated with no agency given the authority to examine the full scope of their operations;
• Merging the Office of Thrift Supervision (OTS) and Office of the Comptroller Currency (OCC) to consolidate and reduce the number of banking regulators, improving the effectiveness of the entire system. This merger has been recommended by many experts, and the Treasury Inspector General recently raised concerns about the objectivity and effectiveness of OTS;
• Protecting the rights of states to regulate the insurance industry.