The Committee on Capital Markets Regulation, an independent research organization consisting of twenty-five leaders from the investor community, business, finance, law, accounting, and academia, released today a comprehensive report entitled, “The Global Financial Crisis: A Plan for Regulatory Reform”. The Committee also said it plans to release a comprehensive list of recommendations calling for an overhaul of the rules supervising financial markets, reducing systemic risk, and making markets more transparent.
Here are some of the key recommendations:
1) Keep two or three regulators for the financial system – the Fed, a new U.S. Financial Services Authority, and an investor and consumer protection agency. The USFSA “would regulate all aspects of the financial system, including market structure and activities and safety and soundness for all financial institutions.”
2) Mandate centralized clearing of credit default swaps. To the extent that some CDSs stay outside a centralized clearing process, the committee calls for higher capital requirements to “compensate for increased systemic risk of these contracts.”
3) Don’t make a hasty decision to raise capital requirements across the financial sector until more analysis is done. But the committee does recommend higher capital requirements for megabanks, such as those with more than $250 billion in assets. “Given the concentration of risks to the government and taxpayer, we recommend that large institutions be held to a higher solvency standard than other institutions, which means they should hold more capital per unit of risk.”
4) Strengthen the “leverage” capital ratio, and debate whether the leverage ratio should be based on common equity rather than total Tier 1 capital.
5) Give the Fed temporary authority to evaluate confidential information supplied by hedge funds.
6) Relax acquisition rules to make it easier for private equity firms to pump money into the banking sector.
7) Create a comprehensive policy called the Financial Company Resolution Act, that would be allowed to put any financial company into receivership, not just “systemically” important ones.
8) Ban or limit high-risk mortgages from being securitized.
The report also recommends the need to reduce the interconnectedness problem of credit default swap contracts by the use of clearinghouses and exchanges. If clearinghouses were to clear CDS contracts and other standardized derivatives, like foreign exchange and interest rate swaps, systemic risk could be substantially reduced by more netting, centralized information on the exposures of counterparties, and the collectivization of losses, the committee said.
These recommendations are the result of a year‐long examination into the global financial crisis and the key deficiencies in the regulatory system.