An Important Step for U.S. Financial Regulation

The House of Representatives passed the Finance Regulatory Reform Act with 223 votes and 202 vetoes on the 11th of this month. That is Obama’s important step forward for the New Deal of finance regulation. If the reform succeeds, the U.S. finance regulation system will be reformed completely.

According to the act, the U.S. will give more power to the regulator of the finance industry to remove those systematic risks that led to the current economic crisis. From now on, operations of merger and acquisition, mortgage releasing, credit evaluation and various financial derivatives all will be regulated by it.

There are two core components of this policy. First, the Federal Reserve Board will be empowered to supervise all enterprises that threaten the stability of finance, including those that do not own banks. The government will establish a Financial Services Supervisory Committee to advise the Federal Reserve Board. That means the Federal Reserve Board will be a main front for U.S. financial regulation.

Then, for market regulation, the New Deal will enforce the supervision of hedge funds and financial derivatives, and make the market more transparent. In response to risks, the New Deal will empower the government to take over some financial giants.

According to Obama’s government, there won’t be any questions about whether a company is too large to fall. The government can also avoid the so-called moral dilemma while bailing out some financial giants.

The new Consumers Financial Protection Agency will be set up to fully protect consumers’ interests. This financial crisis originated from the breaking of the real estate bubble. It is widely believed that the main reason was a lack of effective protection for consumers, which led to the over-loaning of mortgages and other unsuitable financial products consumers could not pay back, and eventually made the crisis much worse.

According to the reform’s solutions, the current policies of the Federal Reserve Board, Securities Exchange Commission, Federal Trade Commission to protect consumers will be unified under the newly established Consumers Financial Protection Agency in order to solve the problem of inefficiency and systematic risks.

The New Deal involves every aspect of the financial industry and considers every group’s interests. It was publicized this summer and was not submitted to the Congress until the end of this year. Obviously, it’s very hard to carry on. At the voting on the 11th, the two parties stood against each other, with all Republicans voting against it. At the subsequent voting in the Senate, the fight is supposed to be even bloodier, so that there is the possibility it will not be passed before the end of this year.

There is opposition to the New Deal primarily for two reasons. Some criticize the super regulatory role of the Federal Reserve Board. As a central bank, the board is powerful enough already in the economic and financial arenas, and, if it is entitled to more supervisory power, there will be bigger systematic risks.

Some financial institutions worry that the newly established Consumers Financial Protection Agency will compromise their profitability and ability to compete, so they are lobbying hard against the clause.

The reform will redistribute power among many supervisory institutions, so those who are deprived are complaining. For example, Federal Reserve Chairman Bernanke insists the function of the Federal Reserve Board to protect consumers should not be taken away. While other institutions, the Securities Exchange Commission and federal deposit insurance companies are claiming the Federal Reserve has affected their supervisory functions by holding power solely by itself.

According to the U.S. legislation procedure, the reform solution of financial regulation must be passed by the House of Representatives, the Senate and then endorsed by Obama to formally become a law. For the time being, the financial crisis has not ended and the idea of more strict regulation is shared by all. Obama will probably work hard to promote the New Deal as his top priority.

In the global scope, the loopholes in the U.S.’s financial regulation system harmed other countries badly. It’s a popular move for the U.S. to fix these loopholes. However, it’s worth mentioning that, as a rule-maker of international financial games, the U.S.’s New Deal will not only change the current rules domestically, but also deeply impact the international financial system.