Everybody's talking about the need for changes in the U.S. financial regulatory system. This week the U.S. GAO released its framework for crafting and assessing modernization proposals. First the report highlights the major problems with our current system:
- Regulators have often failed to mitigate systemic risks posed by large and interconnected financial conglomerates and to ensure they adequately manage their risks.
- Regulators have had problems addressing financial market problems resulting from activities of less regulated markets -- non-bank mortgage lenders, hedge funds, and credit rating agencies.
- New and complex investment products have not been adequately monitored or even understood.
- Standards set by accounting and financial regulators have not kept up with financial market developments.
- Attempts to coordinate internationally with other regulators have been difficult because of the fragmented U.S. regulatory structure.
Actually it's this fragmented structure that is at the root of all our problems. Today, we have almost a dozen federal banking, securities, futures and other regulatory agencies. The Federal Reserve System was created in 1913 and most of the remaining agencies were created in response to the Great Depression. Now that we seem to be nearing that same type of financial devastation, we need to reconsider that entire regulatory structure.
The GAO recommends:
1. We set clearly defined goals for the regulators to be sure they can carry out their missions and be held accountable.
2. Regulations should be appropriately comprehensive. They should cover all activities that pose risks and should be certain that the regulations match the level of scrutiny needed. Some activities may need more regulations than others.
3.We need to develop a system-wide focus that identifies, monitors and manages risks to the financial system regardless of the source of the risk.
4. The new regulatory system must be flexible and adaptable to respond to the rapidly changing market and new innovations.
5. Effective and efficient oversight should be developed, eliminating overlapping federal regulatory missions.
6. Consumers and investors should be able to depend upon consistent protection and this protection should be part of the regulatory mission.
7. Regulators should be independent from inappropriate influence.
8. We must have consistent financial oversight among similar institutions, products, risks and services.
9. There should be minimal taxpayer exposure. The financial markets should be able to absorb failures and not need federal intervention.
You can read more about the framework and reasoning behind it in the report. While I think everyone can agree that major changes are needed, we must develop the new financial regulatory system carefully to be certain the new design does fix the problem as well as set up the appropriate framework for the 21st century.
Lita Epstein has written more than 25 books including, "Reading Financial Reports for Dummies" and the "Complete idiot's Guide to Value Investing."
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