Financial Reforms, Obama style.

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

Consolidated supervision of Tier I FHCs:  The present crisis has exposed the weaknesses  in the present supervisory systems.   Arising out of this, it was decided to have one consolidated supervisor and regulator for all Tier I FHCs, with a thorough understanding of the operations and activities of each firm.  

Therefore, the Gramm-Leach-Bliley Act (GLB Act) is to be done away with to facilitate the process of having a sigle supervisor and regulator as pointed out earlier.

In order to ensure transparency in the process of supervision and regulation, the Federal Reserve would have the right to examine any Tier I FHC and it’s subsidiaries, including those having a primary supervisor.   The Fed Reserve would consult with the primary supervisor and the Treasury, before initiating any corrective action against the Tier I FHC for any omissions and commissions.

The fundamental issue to be addressed in the process of supervision and regulation is to take an overall view of the Tier I FHCs, rather than concentrate on individual firms.   Even though individual firms may not appear to pose a threat to the system, when combined with the shortcomings of all such firms, a different picture may emerge.   Therefore, holistic approach should be adopted that assesses and evaluates the combined risk posed by the Tier I FHCs, and their arms to the system.   In other words, the consolidated supervision of a Tier I FHC should be macroprudential in focus.

One of the most important decisions to emerge from the review of the financial system and the proposed reforms is in regard to the scope and role of the Fed Reserve System.   Several new responsibilities would be given to the Fed Reserve, while it’s existing role in consumer protection would be reduced.

The Fed Reserve is expected to give it’s recommendations for a change in its charter and activities by October 2009.   This would be done in consultation with Treasury and external experts in order to get the perspectives and ideas of those not connected with it.

                                                                                         To be concluded.