US Regulation For Financial Giants Expected Soon

It has been reported Friday morning by CNBC that the White House and Congress are working on a legislation that allows the federal government to take over and unwind the businesses of a large financial institutions like AIG (AIG), the way it now can with commercial banks.

The regulatory authority similar to the FDIC’s so-called “bridge bank” powers was originally sought to be included in a broader reform package addressing systemic risk. But it is now reported to being crafted urgently as a stand-alone legislation in the wake of the public outrage over the AIG bonuses. While reacting to the AIG’s bonuses, President Obama talked about “developing tools to prevent ourselves from getting in a situation where an AIG can threaten the entire financial system.”

Fed Chair Ben Bernanke had also placed importance on “orderly resolution of systemically important financial firms” in the regulatory reforms proposed by him recently.

The Chairman of the U.K.’s Financial Services Authority, Adair Turner, on Wednesday submitted to the Government his proposal for a new regulatory regime for the financial services industry. His recommendations include a new European Independent Regulatory Authority to oversee the national supervisors, extension of regulatory powers over non-bank financial institutions that are systemically important, in addition to improving the quality and quantity of the capital for banking system, putting a cap on the leverage, etc.

We also need to move ahead as soon as possible on the broader legislation for the “Systemic Risk Regulator” or a “Super Regulator” for the financial system, which could coordinate amongst the regulatory authorities supervising the various components of the financial system and also look at the big picture of risk.

A systemic-risk regulator (either the Federal Reserve or the FDIC) could also be vested with the authority to seize and restructure critically impaired firms before they threaten the broader system.

Equally important is the coordination among the national supervisors to properly oversee the risks of financial behemoths like Bank of America (BAC), JP Morgan Chase (JPM) and Citigroup (C), which have operations all over the world.

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