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May 27, 2009

Is It Time For a Super-Regulator?

Catherine New
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In an interview with Nightly Business Report on Monday, Dean Glenn Hubbard said that President Obama’s stimulus package gets positive marks for “stopping the free fall in the U.S. economy.” However, the dean also said that improving financial markets and institutions and changing the regulatory structure are key to economic recovery.

Indeed, the Committee on Capital Markets Regulation, which is co-chaired by Dean Hubbard, released its report on Tuesday. The executive summary outlines 57 specific recommendations for overhauling financial market regulations. The recommendations cover an extensive swath that includes credit default swaps, ratings agencies, accounting standards, hedge funds and international regulation (view the complete executive summary).

A few of the Committee’s recommendations:

13. Hold Large Institutions to Higher Solvency Standards

15. Maintain and Strengthen the Leverage Ratio

31. Prohibit or Restrict High-Risk Mortgage Products and Lending Practices from Entering the Securitization Market

38. Develop Globally Consistent Standards [for credit rating agencies]

42. Increase Disclosure as to How Ratings Are Determined

47. Refrain from Reimposing Glass-Steagall

50. Increase the Role of the Fed

51. Establish the USFSA [U.S. Financial Services Authority, an organization to “regulate all aspects of the financial system, including market structure and activities and safety and soundness for all financial institutions”]

56. Enable the IMF to Play an Early Warning Role

The question of systemic risk and how to prevent it has been at the fore since the crisis hit the markets in full force last year. Leading faculty and industry experts explored the issues at the Bernstein Center’s “Preventing the Next Financial Crisis” symposium held last December (download conference proceedings, PDF).

In February, professors Bruce Kogut, Patrick Bolton and Tano Santos also proposed the creation of a Crisis Resolution Board (see blog post). In a Forbes.com op-ed, the professors emphasized that “regulatory reform should seek to distinguish between crisis prevention and crisis resolution. Prevention relies upon a tripartite structure and clear rules of accountability. Crisis resolution demands an integrated approach to systemic risk.”

Photo credit: Joe Hatfield