The U.S. Treasury's recently unveiled plan to modernize the country's financial regulation has been criticized by some as overregulation and by some as crafty deregulation. To other observers, meanwhile, the move appears to be more of a power grab on the part of the Federal Reserve.

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	The U.S. Treasury's recently unveiled plan to modernize the country's financial regulation has been criticized by some as overregulation and by some as crafty deregulation.

However, many experts have been calling for the moves for more than a year now as a means to arrest concerns over the nation’s diminishing control of global financial forces.

The modernization of the regulatory structure was overdue, they argue, as the current system is ill-equipped to streamline today's complex financial world. The system’s failure to keep an eye on investment banks, hedge funds, and mortgage companies has deeply wounded the nation’s economy.

The Key Changes Proposed by the Treasury

The country’s current financial services regulatory system is a jumble of inefficient regulatory agencies. The Treasury plan calls for significant measures to achieve market stability by monitoring key areas like banks, thrifts and credit unions, disclosure, and consumer protection. Some of the key measures being proposed include:

1. Market Stability Regulator
Under the plan, the Fed would be made responsible for exposing the practices of all types of financial firms that threaten to wreck the stability of the system. It would also be granted expanded powers to intervene in a financial crisis and take corrective action.

2. Prudential Financial Regulator
Instead of five separate federal agencies, a single regulatory body would supervise banks. This measure would eliminate the Office of Thrift Supervision.

3. Business Regulator
The plan proposes setting up an agency dedicated to protecting consumers and investors.

4. Mortgage Origination Commission
The Treasury suggests forming a federal mortgage origination commission within a few months. The new body would focus on establishing minimum licensing criteria for mortgage lenders and underwriters, and rate states' performance in implementing their own regulations.

5. Option of Federal Charter to Insurance Companies
Insurers who are currently regulated by states in which they operate would be offered — just like banks — the option of a federal charter. Because current regulations vary from state to state, the structure has become cumbersome. Moreover, errors by the states have proved costly and in many cases have adversely affected the growth of national products.

The Implementation Aspects of Proposals

The Treasury proposals have attracted widespread acclaim and criticism. Though many analysts are less than enthusiastic about the plan, the idea of modernizing the regulatory system has assumed a sense of urgency due to the ongoing credit crisis and the near-collapse of Bear Stearns, one of the largest investment banks in the U.S.

However, the Treasury’s suggestions are long-term measures and are not likely to achieve miracles in the short term. In fact, according to Treasury Secretary Henry Paulson, most of these reforms should not be implemented in the midst of the current market turmoil.

The nation’s patchy financial regulatory system is clearly in need of improvements, and the Treasury plan certainly deserves credit for making a sincere attempt to modernize regulations in a way that may lead to greater control over the complex financial market.

It is widely known that more regulation can never be a substitute for market discipline. All the same, we can hope that the proposed reforms will be implemented with the utmost sincerity and succeed in winning back the nation’s confidence in its own financial systems.

On the net:

Financial Regulation Isn't Working

Mr. Paulson's Starting Point

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