Confused about Financial Sector Regulation?

The White House will release its revised plan to overhaul financial sector regulation next week. The original plan called for a consolidation of regulating agencies and a simplification of the so called “alphabet soup” of regulators. Political games on the Hill turned nasty as bureaucrats dug in their heals, and choosing to pick its battles, the administration looks like they will bow to the pressure. From the FT:

Tim Geithner, the Treasury secretary, will next week unveil revised plans, which are likely to include the creation of two new structures on top of the existing alphabet soup of agencies. These will include a “council of regulators”—likely to comprise the heads of the largest agencies—which will oversee the Federal Reserve’s new uber-regulatory role of overseeing systemic risk.

There is also likely to be a new agency to regulate consumer products, such as mortgages and credit cards. Far from simplifying Washington’s inefficient system of regulation, many fear the envisaged reforms will “Balkanise the Balkans”, as one financial lobbyist put it.

Many, including myself, have found this overlapping of oversight to be somewhat mind twisting. The Financial Times developed a pretty good interactive graphic that helps breakdown the complication—or at least, it shows why the confusion exists. Check it out here.

In terms of analysis on the proposals, something to look for will be the make up of the proposed “council” and what its powers will be. Treasury Department and various economic councils within the administration are already in some ways serving like a council with oversight of Wall Street. This will essentially get the big players—the SEC, the FDIC, CFTC, NCUA, and the Fed—all in one room to talk shop. But what kind of powers will the staff of this council have to act on a perceived problem in the market? What will the relationship of their staff be to those at the Fed or elsewhere? If none at all, look to see what value the administration is placing on this council other than just as a symbolic gesture.

The other likely proposal, a Financial Products Safety Commission if you will, would seek to protect investors and debt holders by ensuring credit card companies, mortgage lenders, commodities traders, mutual fund brokers, and other product management firms don’t abuse the funds of their clients. This commission would establish and enforce rules to protect investors much in the same way that other safety commissions ensure the security of lead based toys, toasters, or automobiles.

Currently, the SEC and Commodity Futures Trading Commission work together to protect investors from fraud and predatory business practices. The concern of many, including banks, is that regulations passed down by the new authority will increase their costs of production because of compliance issues. Just as laws uniform safety standards on electronics increase the costs of those products, so too would more directed rules at financial products decrease opportunities to create wealth and limit choice for consumers. Investors who want to take more risk with the possibility of greater rewards could have their options limited by a heavy regulating hand.

The GOP released its overhaul plan yesterday, some thoughts on that later today on the blog.