Treasury Proposes Massive Regulatory Overhaul

Treasury Secretary Henry Paulson released an ambitious and far-reaching plan to revamp and consolidate regulation of the U.S. financial services system. The 218-page Blueprint for Modernized Financial Regulatory Structure, which Paulson described as a two- to eight-year reform plan, makes the Federal Reserve the "market stability regulator" to manage overall liquidity and systemic risk within the financial system, and advocates eliminating the thrift charter and merging the Office of the Thrift Supervision into the Office of the Comptroller of the Currency, ideas that ICBA has vigorously and consistently opposed.
The plan, which for practical purposes is left for the next administration and Congress to consider, is divided into short-term, intermediate-term and long-term recommendations. It would create a new federal commission to establish national mortgage lending standards, beef up federal enforcement of mortgage lending, and implement a system to monitor and rate mortgage broker licensing and other activities at the state level to help address the current mortgage difficulties. Longer term, it would consolidate all federal banking regulators into a Prudential Financial Regulator and create a Conduct of Business Regulator to oversee consumer and investor protection. Institutions with federal deposit insurance would no longer be state-chartered. The proposal would also consolidate existing regulation of securities and commodities futures under a single agency, and create an optional federal insurance charter.
ICBA President and CEO Cam Fine forcefully criticized the "seriously flawed" proposal for broadly remaking the financial system's regulatory framework, explaining that the recommendations could "spell the end of community banking in the United States." In the statement, Fine said the proposal would "eliminate the dual banking system, gut state regulatory authority across nearly the entire financial services spectrum, and heighten systemic risk by furthering bank consolidation and concentration of our nation's financial assets."
ICBA strongly supports the dual banking system, maintaining multiple regulators and maintaining independent financial regulators, because multiple regulators serve as a vital check and balance over the misuse of government power. "We should no more eliminate the checks and balances in the current bank regulatory system, than eliminate the multiple branches of government that are the foundation of our country," Fine said. "Overwhelming concentration of power in any sector is counterproductive."
ICBA will continue to work on behalf of community banks to ensure any changes to our current financial regulatory regime recognize the nation's 8,300 community banks and their vital role in our nation's economy. The timing of the plan, with less than 10 months to go in the Bush administration, for all practical purposes, leaves any future action for the next Congress and administration to consider.