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Backgrounder: Obama Administrations Plan for Financial Regulatory Reform

On June 17, 2009, President Obama proposed plans for sweeping changes to our financial regulatory system to better oversee the complex system of financial products and services and prevent future financial crises. This backgrounder provides an overview of that plan.
 
     For more than two decades, the trend in the U.S. has been towards deregulation in our financial regulatory system. On June 17, 2009, President Obama proposed plans for sweeping changes to our regulatory system that would abruptly reverse that trend. Blaming the financial crisis on a "culture of irresponsibility," President Obama announced the administration's plans to institute a new regulatory regime to better oversee the complex system of financial products and services and prevent future financial crises. The administration hopes to have the new legislation in place by the end of the year. While not in agreement with all aspects of the administration's proposed plan, Senator Christopher Dodd (Chairman of the Senate Banking Committee) and Representative Barney Frank (Chairman of the House Financial Services Committee) predicted that some version of regulatory reform would be in place by year-end.
 
     As laid out in the White Paper on Financial Regulatory Reform, the administration's plan has five components. Items from the White Paper summary of recommendations are highlighted below.
 
     (1)     Promote Robust Supervision and Regulation of Financial Firms
  • Create a Financial Services Oversight Council to, among other things, coordinate among the regulatory agencies; identify institutions that are too big to fail; and provide a forum for resolving disputes between regulators.
  • Implement heightened and consolidated oversight of all large, interconnected financial firms. The Federal Reserve would have the power to supervise and regulated these Tier 1 FHCs -- defined as any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed -- and would have the authority to impose stricter capital, liquidity, and risk management standards, and its authority would extend to subsidiaries of the parent company.

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