U.S. Sweeping Financial Overhaul & Financial Stability Board

Financial Regulatory Reform - A New Foundation. Do we even remember such a thing was announced? It was announced by the president of the U.S. on Wednesday, June 17, 2009, a mere 10 days ago. (Can you believe it?) It is said to be the largest, the most comprehensive overhaul of the U.S. financial system since 1930s.

I forgot all about it as the administration's blitzkrieg or "shock and awe" continued unabated - health care system reform, climate bill that just passed the House, talk of comprehensive immigration reform, cyberspace regulation (military and bloggers), to name a few.

But I just saw a headline on Bloomberg that started a chain reaction in my brain:

FSB’s Draghi Sees Signs of Improvement in Economy
(6/27/09 Bloomberg)

"The world economy is showing “convincing signs of recovery,” Mario Draghi, chairman of the newly created Financial Stability Board, said today after its first meeting. "

Mario Draghi? Who's this? Financial Stability Board? What is this? So I searched the net.

It turns out that Dr. Draghi is the governor of Bank of Italy (Italy's central bank) who has strong ties to the U.S., and Financial Stability Board was set up as the result of G20 London summit in April. The Board consists of central banks and financial regulatory authorities in G20 countries plus Hong Kong SAR, Singapore, the Netherlands, Korea, Spain and Switzerland. International institutions like BIS, ECB, IMF, World Bank, EC, OECD are also its members, along with another set of international standard setting bodies.

But "financial stability".... Where did I see this two words together like this? Then I suddenly remembered. That's the name of the new website set up by the U.S. Treasury Department after the June 17 announcement by the president! The site is http://www.financialstability.gov/.

Coincidence? The two words, financial stability, are generic enough. But I decided to dig a little bit more. Here's what I found about what the Board is supposed to regulate or monitor, from the Financial Stability Board's own website and from the article that appeared in Guardian UK when the Board was set up back in April:

• Monitoring and regulation of "systemically important" (too big to fail) institutions
• Regulation of highly leveraged institutions (hedge funds)
• Regulation of derivatives market (CDS)
• Regulation of offshore financial centers
• Sound compensation practice
• Cross-border cooperation on crisis management

These look awfully familiar. Let's go to the U.S. Treasury's own "FinancialStability.gov" site:

• Supervision and regulation of all large, interconnected firms that pose systemic risk
• Closing of loopholes in banking regulation (offshore financial centers)
• Regulation of hedge funds and private capital pools (dark pools)
• Regulation of securitization market, OTC derivatives including CDS
• Better compensation practice
• International regulatory standard and cooperation

Familiarity can't be denied. So which came first? I'd say Financial Stability Board, which existed in other forms since 1999. The largest, most comprehensive financial overhaul in the U.S. is to be based on the international template.

What's uniquely American (so far anyway) is the provisions for:

• Creation of a consumer protection agency
• Increased oversight on insurance industry

The second item is now very curious to me, with this news on Friday (6/26) that New York Fed is taking $25 billion stake in preferred shares in two of A.I.G.'s two Asian operations:

"The troubled insurance giant, which has received multiple federal bailouts since September, said that it would give the New York Fed preferred stakes in two of the company's crown jewels -- Asian-based American International Assurance, or AIA, and American Life Insurance Co., or Alico, which operates in more than 50 countries. "

Alico may operate in more than 50 countries, but half of its revenues comes from its Japanese operation. Japanese insurance companies are crying foul because of "unfair" advantage this gives to Alico (implicit guarantee from the U.S. government). So New York Fed will own insurance companies and they want to regulate insurance industries. (Is a Federal Reserve Bank allowed to own a private company?)

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