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The Government Accountability Office compiles a history of regulatory failures and proffers some general suggestions on how to fix them.
Tim Reason, CFO.com | US
January 12, 2009
The nation's fragmented financial regulatory system is well beyond retirement age and ready for replacement, says a report released Friday from the Government Accountability Office. With the nation in the midst of a severe financial crisis, the GAO report is the latest in a slew of official and unofficial reports aimed at overhauling the nation's financial regulatory system.
"As the nation finds itself in the midst of one of the worst financial crises ever," says the report, "the regulatory system increasingly appears to be ill-suited to meet the nation's needs." Indeed, the report notes that portions of the current regulatory system date back to the Civil War and points out that most banking and securities regulation was put in place at the turn of the century or during the Great Depression.
Unlike most other reports — which propose specific changes — the GAO report is intended, as its title suggests, to provide "A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System."
The GAO report is perhaps most interesting as a history of the United States's current regulatory system, which it details at some length. Its conclusions, by contrast, aren't particularly surprising: Any reform proposal, the GAO says, should have clearly defined regulatory goals and a system-wide focus, and should be comprehensive, flexible, efficient, and cost effective to the taxpayer. Regulators, it says, should be independent and accountable, and institutions that are similar should be subject to consistent regulation.
However, with reform proposals already legion and more on the way, the framework is likely to come in handy. For example, this Thursday, Former Federal Reserve Chairman Paul Volcker will present reform proposals by the Group of 30. The G30, as it is often called, is a group of financiers and academics of which Volcker is also chairman. The report, called "Financial Reform - A Framework for Financial Stability" will propose reforms for regulation of the global banking system, hedge funds, and derivatives, as well as recommendations for changes in accounting and international capital/liquidity standards. It will also propose changes to rating agencies and fair-value accounting.
Whatever they turn out to be, the recommendations of the G30 report have a significant chance of being enacted: Volcker was recently appointed chairman of President-elect Barack Obama's Economic Recovery Advisory Board. New York Fed President Timothy Geithner, Obama's choice for Secretary of the Treasury, is also a G30 member, as is Lawrence Summers, who has been tapped to head the President-elect's National Economic Council.
Another significant recent reform proposal is the Treasury Department's Blueprint for a Modernized Financial Regulatory Structure. Among its recommendations, that report proposed combining the Securities and Exchange Commission with the Commodity Futures Trading Commission and handing more lending and oversight power to the Federal Reserve.
How all this regulatory navel-gazing will affect publicly traded corporations remains to be seen. Some combining of regulatory agencies, particularly the SEC and the CFTC, seems likely, since most reports decry the fragmented state of financial regulation in the United States. Likewise, many reports point out the need for more international coordination, a call that bodes well for the adoption of International Financial Reporting Standards in the United States, even though such a move is controversial and heavily associated with the outgoing Republican administration.