Financial Reform Movement in Retreat?

It looks like the Obama administration is tempering its ambitions for financial regulatory reform. It seems that the potential political brouhaha that would accompany a reduction in the number of agencies overseeing the financial markets would expend too much political capital. Instead, the administration will focus on securing broader powers for existing regulators to limit risk-taking. While the revamp of oversight will dramatically change the regulatory environment for finance, has the US missed an historic opportunity to completely overhaul the arcane regulatory framework of US finance? Possibly. It seemed as if the financial crisis presented lawmakers with a clear path to reworking the system. As time has passed and the global financial system has stabilized somewhat, the outcry for major structural change has become less loud. reform hawks will no doubt be disappointed by anything short of wholesale change to the system and will lament the loss of reform momentum.

The links:

• Te Obama administration wants Europeans to put their banks through much more rigorous public stress tests to ensure survival in a slipping economy.
  
• Deloitte & Touche released its 6th Global Risk Management Survey. The survey indicates that banks and other financial institutions continue to have significant opportunities to strengthen their risk management processes and tools.
• As plans for banks to leave TARP solidify, the WSJ wonders what to do about Citigroup.
• The 10 banks that got the green light to repay TARP include: Goldman Sachs, JPMorganChase, Morgan Stanley, American Express, Bank of New York Mellon, BB&T, Capital One, Northern Trust, State Street and US Bancorp.
• SIFMA Chief Executive Tim Ryan says that Wall Street accepts its share of responsibility for the crisis and intends to partner with the governments to overhaul the regulatory system.
• Morgan Stanley says there has been a fierce rally in leveraged loan CDO's.

G-20 moves forward on regulatory framework

The new era of finance is now dawning in earnest. Word from the G-20 meetings in London is that world leaders have agreed on a regulatory framework for countering excesses that led to the current global financial crisis. In particular, the group called for stricter limits on hedge funds, executive pay, credit-rating agencies and bank risk-taking. In addition, they pledged more than $1T in emergency aid to assist with collateral damage from the crisis. While countries will mainly be left to regulate their own markets and companies, the G-20 recognized a need for some global oversight by establishing a new Financial Stability Board to promote regulator cooperation and work with the IMF. Hedge funds defined as "systemically important" will be subjected to greater regulation and oversight. Pay and bonuses will be examined to create "sustainable compensation schemes". Accountants will need to improve valuation methods and creit rating agencies will need to meet a new code of standards.

Meanwhile, focusing back on the US, KC Fed President Thomas Hoenig endorsed the notion of the Federal Reserve becoming the regulator for systemic risk in US finance. In Geithner's recent proposal, such a systemic-risk regulator would have the authority to compel companies to boost their capital and curtail borrowing, as well as to seize companies get into trouble.

The Financial Stability Forum agreed to move towards creating stricter capital requirements for banks around the world, reversing their prior view of giving financial institutions more flexibilty in how they calculate reserves.

Ron Resnick, co-founder of financial consulting firm CounselWorks has an interesting piece on his views about government assumptions in the regulation of financial firms. He questions Treasury's new supervisory and regulatory foundation based upon the concept of "systemically important firms".