Financial Reforms, Obama style.

This is the sixth in a series of articles on the financial reforms sought to be implemented by the Obama Adminstration in U.S.A.

Identification of Tier I FHCs:   The following are the criteria to determine if a financial firm is qualified to be called a Tier I FHC:

1. What impact the failure of the firm would have on the stability and well-being of the financial system, and the economy, as a whole.
2. The combination of the size, leverage, and the extent of the firm’s dependance on short-term funding.
3. The importance of the firm as a source of financing to households, businesses, and governments, local and state, and also as a source of liquidity for the financial system.
4. The Federal Reserve would consult Treasury in identifying the Tier I FHCs.
5. However, The Fed would have the discretion to consider factors other than those mutually agreed upon with the Treasury in the above exercise.
6. The reasons for this discretion given to the Fed is to enable it to monitor and counter innovative approaches of the firms to escape regulatory processes.
7. Firms might route transactions outside of their Balance Sheets to escape the eyes of te regulators.   Hence flexibility given to the Fed is justified.
8. The identification process of the Tier  I FHCs would include an analysis of  the systemic importance of the firms under stressed economic conditions.
9. Such analysis should include the result of the firm’s failure on other such firms, on payment, clearing and settlement systems, and availability of credit in the economy.
10. Where the subsidiary of a firm is subject to supervision by other federal agencies, the Fed must consult them before subjecting the parent to Tier I FHC regulation.
11. Classification of Tier I FHC should be a regular exercise.
12. The Council would have the authority to recommend the designation of a firm as a Tier I FHC to the Fed.
13. The Fed would have access to necessary and relevant information from financial firms, as well as other regulators to determine their classification as Tier I FHCs.
14. The Fed would have authority to examine firms crossing the laid down threshold limits to determine their ability to threaten financial stability.
15. However, the Fed would itself operate within limits laid down for it, and not overdo its act.

                                                                                     To be concluded.