Establish Comprehensive Supervision and Regulation of Financial Markets
Enhanced regulation should extend to securitizations, credit rating agencies, and OTC derivatives. For securitizations, issuers and originators should retain an interest in securitized assets.
The report observes that such instruments were supposed to better distribute risks and promote efficiency. Rather, in fact, it concentrated the risk in opaque ways. Securitizations were an incentive to lack of market discipline on granting credit. Investors were overly reliant on credit rating agencies, which failed to accurately describe the risk of issues.
The report addresses the case of derivatives, emphasizing that those were a major contagion vector. It proposes to enforce record keeping and reporting requirements on all OTC derivatives and to trade standardized derivatives through clearinghouses. The Federal Reserve authority over market infrastructure (clearing and settlements) should be enhanced.
Protect Consumers and Investors from Financial Abuse
This section proposes the creation of a new "Consumer Financial Protection Agency" (CFPA). It emphasizes that consumer protection is a critical foundation of the financial system, while regulations should promote growth, efficiency and innovation in the long run. The CFPA should have an independent role as a supervisory and enforcement authority and promote effective regulations. It should ensure transparency, simplicity, fairness and access to all consumers. For investors, the SEC is in charge to promote transparency and accountability.
Improve Tools for Managing Financial Crises
The report recognizes that financial authorities have currently no other choice than bailouts or financial collapse when a major institution fails, and proposes to define a new regime to address the "too big to fail" issue. The report recommends that a "new resolution regime" be implemented to avoid the "disorderly resolution" of failing bank holding companies and Tier 1 Financial Holding Companies, but it does not specify how such a "new resolution regime" would be defined.
Raise International Regulatory Standards and Improve International Cooperation
The report aims at coordination of supervision internationally on strengthening the capital framework and enhanced crisis management tools. For coordination, a "Financial Services Oversight Council" would gather the principal federal regulators, a national bank supervisor would coordinate national efforts and an Office of National Insurance will extend the scope of coordination to insurance companies. Arbitrage across different regulation regimes towards the "loosest" standards imposes more consistency across statuses of financial firms and across boundaries. The paper supports the international efforts on core issues, regulatory capital standards, and oversight of financial markets, supervision of internationally active firms and crisis prevention and management.
The paper supports the guidelines of FSF paper, with a prominent role of the BCBS on reviewing Basel guidelines. This includes a variety of recommendations, beyond reinforcing the FSF mandate:
• new regulations on liquidity risk
• new regulations on the clearing of OTC derivatives
• extension of the scope of regulations
• better compensation practices
• improvement of accounting standards
• more forward-looking accounting standards for impairment
• tighter oversight of rating agencies
• macro-prudential focus.