US Lawmaker Calls For Shake-Up Of Financial Services Regulation

by Glen Shapiro, LawAndTax-News.com, New York

24 March 2008

Congressman Barney Frank has called on Congress to consider new ways to regulate the financial services industry in the United States to help stabilize the housing market and address the current economic downturn.

During a speech to the Greater Boston Chamber of Commerce on 20 March, Frank, who chairs the House of Representatives Committee on Financial Services, said that Congress should seriously consider establishing a “Financial Services Risk Regulator” that has the capacity and power to assess risk across financial markets regardless of corporate form and to intervene when appropriate. At the least, this role should be given to the Federal Reserve, he argued.

"In exchange for potential access to the discount window for non-depository institutions, this regulator could have enhanced tools to receive timely market information from market players, inspect institutions, report to Congress on the health of the entire financial sector and act when necessary to limit risky practices or protect the integrity of the financial system," Frank explained.

The Massachusetts Democrat posited that consideration should focus on how to regulate market behavior not form, noting that "since the repeal of Glass-Steagall, a host of new players have emerged and old ones are doing new things."

"To the extent that anybody is creating credit they ought to be subject to the same type of prudential supervision that now applies only to banks," he stated.

He also said new regulation should enhance consumer protection because the current crisis has shown that "consumer protection, safety and soundness and systemic risk are intertwined."

In addition, Frank said that new legislation should consolidate the duplicative regulatory structure and that the current capital, margin and leverage requirements should be reassessed.

"This crisis has illustrated that seemingly well-capitalized institutions can be frozen when liquidity runs dry and particular assets lose favor," he observed.

Frank urged Congress to act swiftly on legislation he introduced earlier this month which seeks to stem the significant rise in mortgage foreclosures by allowing the Federal Housing Administration to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders.

Such legislation would provide at least USD10 billion in loans to states to address the foreclosure crisis and expand the FHA loan program to offer guarantees to refinance at-risk borrowers into viable mortgages, he believes.

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