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THE WHITE PAPER FROM THE WHITE HOUSE

The White House document basically supports the FSF document and adds other dimensions, in addition to proposing a reform of the US regulation system. The five key objectives of the proposed reforms are:

1 "promote robust supervision and regulation of financial firms"

2 "establish comprehensive supervision and regulation of financial markets"

3 "protect consumers and investors from financial abuse"

4 "improve tools for managing financial crises"

5 "raise international regulatory standards and improve international cooperation."

For those purposes, the report proposes new roles for the Federal Reserve and to create new agencies for enhancing risk supervision and coordination. The Federal Reserve and the Federal Deposit Insurance Company, the SEC and the Commodity Futures Trading Commission (CFTC) will retain their previous roles.

Supervision

The report proposes that any firm that poses a "significant risk" to the financial system should be regulated. Those firms are the "largest, most interconnected and most highly leveraged" firms, also called Tier 1 "FHC" (Financial Holding Companies). For such firms, cost of failure should be "internalized" rather than imposed on the society, through tighter regulations than for other financial firms and should be "system-wide." This includes capital requirements, liquidity standards, liquidity risk management and liquidity stress tests, with both firm-specific and market-wide scenarios.

It proposes that the Federal Reserve be in charge of supervision of these firms, stronger capital requirements and the registration of all hedge funds to the SEC (Security and Exchange Commission - the authority in charge of regulating the financial markets). The regulation within the US should be unified through a National Bank Supervisor.

Under this section, the report proposes that capital and liquidity requirements were "simply too low" and that regulation was insufficient. It emphasizes the adverse effect of the fragmentation of supervisory authorities in the US. Anew Financial Services Oversight Council should be in charge of filling out gaps in regulations and to facilitate national coordination.

The federal regulator should better align compensations practices with long-term shareholder value, notably by providing the faculty of shareholders to influence the compensations of senior executives. Standard setters should promote more forward-looking loss provisioning and provide greater transparency on fair value and cash flows.

 
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