Treasury’s Framework for Regulatory Reform

It has been obvious for some time that the outdated US system of financial regulation is badly in need of reform. There have, however, been limited opportunities to unblock the political obstacles to reform, despite valiant attempts by the Paulson Treasury to spur debate with its Blueprint for a Modernized Financial Regulatory Structure and also by many other groups, private, public and academic. The silver lining in the financial crisis may be that at least some elements of reform can now be achieved. Secretary Geithner’s carefully calibrated announcements last week—timed to become public just in advance of the G-20 meetings scheduled in London this week—are an attempt to stage regulatory reform in such a way that those elements where there is the deepest consensus are treated first before more divisive proposals. The need for increased systemic risk regulation and the need for resolution authority for a wide range of systemically important financial institutions are among those priority proposals.

In announcing his new “rules of the road,” Secretary Geithner identified four major axes of reform: addressing systemic risk, protecting consumers and investors, eliminating gaps in the regulatory structure and fostering international coordination. The most detailed elements of the reform package involved systemic risk, including proposed legislation for the resolution of systemically important financial institutions. More detailed frameworks for the other three areas are promised in the coming weeks.

Our recent memorandum, entitled “Treasury’s Rules of the Road for Regulatory Reform,” describes Treasury’s framework for regulatory reform, focusing on the comparatively more detailed proposals for addressing systemic risk, and sets forth some of the issues the government and the private sector may consider as the details are hammered out. A companion memorandum by Randall Guynn, entitled “Treasury’s Proposed Resolution Authority for Systemically Significant Financial Companies” discusses Treasury’s proposed legislation for resolution authority.

The memorandum entitled “Treasury’s Rules of the Road for Regulatory Reform” is available here, and the memorandum entitled “Treasury’s Proposed Resolution Authority for Systemically Significant Financial Companies” is available here.