Financial Regulation

Just last week we learned from the F.D.I.C. that lending by U.S. banks plunged by 3 percent in the third quarter, the largest drop since at least 1984 when this kind of information was first collected. This represents the fifth consecutive quarter in which banks have reduced lending. According to the report, banks reduced the amount of money extended to their customers by $210 billion between July and September, cutting back in almost every category, from mortgage lending to business lending.

The proposals put forth by the Administration regarding the structure of the financial system, the supervision of financial entities, the protection of consumers, and the resolution of organizations that pose a systemic risk to the economy provide a useful framework for discussion of areas in vital need of reform.

The Obama Administration’s White Paper on Financial Regulatory Reform is just the beginning of what is likely to be a legislative, regulatory and ideological marathon, despite the Administration's best efforts to achieve domestic political support before its publication. It is far less revolutionary than some either feared or hoped for and reflects an “art of the possible” approach to regulatory reform by the Obama Administration. Ultimately the White Paper reflects a compromise designed to avoid as much as possible the most difficult regulatory, state and congressional turf battles.

The rating agencies must face tougher disclosure and transparency requirements.  The financial crisis has illustrated the danger flawed methodologies pose to the system. Congress proposed establishing an office dedicated to the regulation of rating agencies within the Securities and Exchange Commission, oversight aimed intently on surveillance of outstanding ratings.