Bush Admin. proposes sweeping overhaul of banking regulation

Apparently studied for over a year (and well before the sub-prime mortgage market started its meltdown), the Bush Administration has proposed an extensive overhaul of how the federal government regulates the banking system, although given a Democratic-controlled Congress, the process could take some time. From an L.A. Times story:

The Bush administration is proposing a sweeping overhaul of the nation's financial regulatory system, combining what is now an alphabet soup of government agencies into three streamlined regulators.

The proposal is the result of a year of study by Treasury Secretary Henry M. Paulson Jr. and has the support of the president, according to Treasury officials who spoke on condition of anonymity Friday...

The Securities and Exchange Commission and a handful of other federal agencies -- all formed in the Great Depression or earlier -- would be restructured and have their responsibilities redefined.

Oversight of the mortgage industry would be stepped up, and states could lose some of their authority to regulate banks...

An outline of the proposal, first reported by the New York Times late Friday and confirmed by Treasury officials, includes short-, intermediate- and long-term changes in the country's regulatory structure...

Many if not most of the changes would need congressional approval, which is far from certain. Both houses of Congress are controlled by Democrats, and this is a presidential election year, so any changes could take years...

In the short term, Paulson's plan proposes:

* Creating a Mortgage Originations Commission that would oversee the home-loan industry, making sure that state-level licensing conformed with a set of new federal minimum standards.

* Consideration of what kind of regulation should be put in place for investment banks that wish to borrow directly from the Federal Reserve.

Paulson has said previously that, although the Fed this month agreed to make loans to securities firms on a temporary, emergency basis, those institutions would have to be more heavily regulated if they wanted permanent access to Fed lending.

In the medium term, Paulson proposes:

* Eliminating the distinction between thrifts and banks under federal law.

* Bringing all state-chartered banks under federal supervision, either through the Federal Reserve or the Federal Deposit Insurance Corp.

* Federal oversight of insurance companies.

* Integrating oversight of the futures and securities markets by combining the Securities and Exchange Commission with the Commodity Futures Trading Commission.

Ultimately, the administration's proposal envisions paring down financial market oversight to just three regulators: a "market stability" regulator based on the Federal Reserve; a "business conduct regulator" based on the current SEC and CFTC; and a "prudential oversight" regulator focused on depository banks, encompassing the current Office of the Comptroller of the Currency and the Office of Thrift Supervision.

A major Wall Street trade group, the Securities Industry and Financial Markets Assn., said in reaction to Paulson's blueprint that there was "universal agreement that it is time to modernize and revitalize the current system" of regulation.

"The present regulatory framework was born of Depression-era events and is not well suited for today's environment where billions of dollars race across the globe with the click of a mouse," the group said.