Q. WHAT IS THE KEY MEASURE?
A. Perhaps the most radical reform is that the Federal Reserve will adopt the role of a systemic risk supervisor with responsibility for the oversight of large firms that could pose a threat to financial stability, even those which do not own banks.
Q. HOW DO THE REFORMS AFFECT CAPITAL REQUIREMENTS?
A. Financial institutions will be required to build up greater capital buffers to tide them over during tough economic times, to create a counter-cyclical approach to capital. Financials will also be made subject to stringent liquidity requirements.
Q. WILL ANY NEW SUPERVISORY BODIES BE CREATED?
A. Yes. Obama announced the creation of a new Financial Services Oversight Council (FSOC) designed to plug holes in the regulatory system.
The FSOC will be headed by the Treasury and composed of the heads of various regulators including the chairman of the Securities and Exchange Commission (SEC) and the chairman of the Federal Deposit Insurance Corporation.
A new Consumer Financial Protection Agency (CFPA) will protect consumers “from unfair, deceptive, and abusive practices”. The CFPA would have the power to require lenders to retain five percent of the credit risk whenever they package loans into bonds.
However, Obama stopped short of merging the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which will instead work more closely together to police derivatives.
Q. HOW HAS WALL STREET REACTED?
A. Standard & Poor’s lowered its credit ratings on 18 US banks shortly after the announcement, saying increased regulation will hurt the already weakened sector. Bank stocks fell on the downgrades. Some American banks, including Goldman Sachs, Morgan Stanley and JP Morgan Chase said the rule to force lenders to keep a minimum of five per cent of the credit risk when they package loans into bonds could hinder a recovery.
Q. WHAT ABOUT HEDGE FUNDS?
A. In a series of measures on the “shadow’ banking sector that echo proposals being drawn up by the European Commission, hedge funds will have to register with the Securities and Exchange Commission, while all over-the-counter derivatives will have to be centrally and transparently cleared.
Q. WHAT ELSE IS INCLUDED?
A. Compensation for employees working in securities will be linked to long-term performance. Generally Accepted Accounting Principles (GAAP) will also be changed so that securities originators reflect income over the life of an asset. Issuers of asset-backed securities will have to disclose more information on staff compensation.