Today's Article
U.S. regulation is
piecemeal and many
essential financial
activities remain
completely
unregulated, says a
recent Congressional
report.
piecemeal and many
essential financial
activities remain
completely
unregulated, says a
recent Congressional
report.
The American Spark
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Many U.S. Financial Activities Still Unregulated
By Cliff Montgomery - Jan. 3rd, 2010
U.S. financial regulation is piecemeal and many essential financial activities remain completely unregulated,
according to a recent report from the Congressional Research Service (CRS).
The CRS study, issued on Dec. 14th, is much-needed reading for every American who wishes to know just
how our banking and financial elites were able to gamble away so much of the people's money--and why it
probably will happen all over again.
Below The American Spark offers the report summary for its readers. The entire report also is available.
"Federal financial regulation in the United States has evolved through a series of piecemeal responses to
developments and crises in financial markets. This report provides an overview of current U.S. financial
regulation: which agencies are responsible for which institutions and markets, and what kinds of authority they
have.
"There are two traditional components to U.S. banking regulation: deposit insurance and adequate capital.
Commercial banks accept a quid pro quo that was adopted in response to widespread bank failures during the
1930s.
"Through deposit insurance, the federal government provides a safety net for some banking operations and in
return the banks that are exposed to depositor runs accept federal regulation of their operations, including the
amount of risk they may incur.
"Since the 1860s, federal banking regulation has sought to prevent excessive risk-taking by banks that might
seek to make extra profit by reducing their capital reserves—at the time called 'wildcat' banks. There are five
federal bank regulators, each supervising different (and often overlapping) sets of depository institutions.
"Federal securities regulation is based on the principle of disclosure, rather than direct regulation. Firms that
sell securities to the public must register with the Securities and Exchange Commission (SEC), but the agency
has no authority to prevent excessive risk taking. SEC registration in no way implies that an investment is safe,
only that the risks have been fully disclosed.
"The SEC also registers several classes of securities market participants and firms, but relies more on industry
self-regulation than do the banking agencies.
"Derivatives trading is supervised by the Commodity Futures Trading Commission (CFTC), which oversees
trading on the futures exchanges, which have self-regulatory responsibilities as well.
"There is also a large over-the-counter (off-exchange) derivatives market that is largely unregulated.
"The Federal Housing Finance Agency (FHFA) oversees a group of government-sponsored enterprises
(GSEs)—public/private hybrid firms that seek both to earn profits and to further the policy objectives set out in
their statutory charters. Two GSEs, Fannie Mae and Freddie Mac, were placed in conservatorship by the
FHFA in September 2008 after losses in mortgage asset portfolios made them effectively insolvent.
"A number of financial markets are unregulated, including some of the largest. No federal agency has
jurisdiction over trading in foreign exchange or U.S. Treasury securities; non-bank lenders fall outside the
regulatory umbrella; and hedge funds, private equity firms, and venture capital investors are largely unregulated
(although their transactions in securities and derivatives markets may be).
"The United States has never attempted a wholesale reformation of the entire regulatory system comparable
to the 1986 'Big Bang' in the UK, which reorganized regulatory agencies across industry lines and sought to
implement a consistent philosophy of regulation. In the wake of the current financial turmoil, however, such a
reevaluation is possible, and a number of broad restructuring proposals have already come forward.
"In the 111th Congress, H.R. 4173 [U.S. House legislation] presents comprehensive reform of the banking
agencies, derivatives regulation, investor protection, systemic risk, and other concerns. In the Senate, a
committee print by Senator Dodd containing comprehensive reform was issued on November 16, 2009."
Like what you're reading so far? Then why not order a full year (52 issues) of The American Spark
e-newsletter for only $15? A major article covering an story not being told in the Corporate Press will be
delivered to your email every Monday morning for a full year, for less than 30 cents an issue. Order Now!
By Cliff Montgomery - Jan. 3rd, 2010
U.S. financial regulation is piecemeal and many essential financial activities remain completely unregulated,
according to a recent report from the Congressional Research Service (CRS).
The CRS study, issued on Dec. 14th, is much-needed reading for every American who wishes to know just
how our banking and financial elites were able to gamble away so much of the people's money--and why it
probably will happen all over again.
Below The American Spark offers the report summary for its readers. The entire report also is available.
"Federal financial regulation in the United States has evolved through a series of piecemeal responses to
developments and crises in financial markets. This report provides an overview of current U.S. financial
regulation: which agencies are responsible for which institutions and markets, and what kinds of authority they
have.
"There are two traditional components to U.S. banking regulation: deposit insurance and adequate capital.
Commercial banks accept a quid pro quo that was adopted in response to widespread bank failures during the
1930s.
"Through deposit insurance, the federal government provides a safety net for some banking operations and in
return the banks that are exposed to depositor runs accept federal regulation of their operations, including the
amount of risk they may incur.
"Since the 1860s, federal banking regulation has sought to prevent excessive risk-taking by banks that might
seek to make extra profit by reducing their capital reserves—at the time called 'wildcat' banks. There are five
federal bank regulators, each supervising different (and often overlapping) sets of depository institutions.
"Federal securities regulation is based on the principle of disclosure, rather than direct regulation. Firms that
sell securities to the public must register with the Securities and Exchange Commission (SEC), but the agency
has no authority to prevent excessive risk taking. SEC registration in no way implies that an investment is safe,
only that the risks have been fully disclosed.
"The SEC also registers several classes of securities market participants and firms, but relies more on industry
self-regulation than do the banking agencies.
"Derivatives trading is supervised by the Commodity Futures Trading Commission (CFTC), which oversees
trading on the futures exchanges, which have self-regulatory responsibilities as well.
"There is also a large over-the-counter (off-exchange) derivatives market that is largely unregulated.
"The Federal Housing Finance Agency (FHFA) oversees a group of government-sponsored enterprises
(GSEs)—public/private hybrid firms that seek both to earn profits and to further the policy objectives set out in
their statutory charters. Two GSEs, Fannie Mae and Freddie Mac, were placed in conservatorship by the
FHFA in September 2008 after losses in mortgage asset portfolios made them effectively insolvent.
"A number of financial markets are unregulated, including some of the largest. No federal agency has
jurisdiction over trading in foreign exchange or U.S. Treasury securities; non-bank lenders fall outside the
regulatory umbrella; and hedge funds, private equity firms, and venture capital investors are largely unregulated
(although their transactions in securities and derivatives markets may be).
"The United States has never attempted a wholesale reformation of the entire regulatory system comparable
to the 1986 'Big Bang' in the UK, which reorganized regulatory agencies across industry lines and sought to
implement a consistent philosophy of regulation. In the wake of the current financial turmoil, however, such a
reevaluation is possible, and a number of broad restructuring proposals have already come forward.
"In the 111th Congress, H.R. 4173 [U.S. House legislation] presents comprehensive reform of the banking
agencies, derivatives regulation, investor protection, systemic risk, and other concerns. In the Senate, a
committee print by Senator Dodd containing comprehensive reform was issued on November 16, 2009."
Like what you're reading so far? Then why not order a full year (52 issues) of The American Spark
e-newsletter for only $15? A major article covering an story not being told in the Corporate Press will be
delivered to your email every Monday morning for a full year, for less than 30 cents an issue. Order Now!
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