WASHINGTON - The Bush administration is proposing a sweeping overhaul of the way the government regulates the nation's financial services industry from banks and securities firms to mortgage brokers and insurance companies.
The plan would give major new powers to the Federal Reserve, according to a 22-page executive summary obtained by The Associated Press.
The Fed would be given broad authority to oversee financial market stability. That would include new powers to examine the books of any institution deemed to represent a potential threat to the proper functioning of the overall financial system.
The proposal, which will be outlined Monday in a speech by Treasury Secretary Henry Paulson, is certain to set off heated debates within different sectors of the financial services industry and in Congress, where some Democrats are likely to complain that the proposal does not go far enough to crack down on abuses.
The administration divided its recommendations into short-term goals that could be adopted quickly, intermediate recommendations and an "optimal" regulatory framework, which contains a radical restructuring of how the government supervises banks and other financial institutions.
The recommendations are the product of a yearlong review that was begun in an effort to modernize the government's regulatory structure so that the country's financial services industries could better compete in a fast-changing global economy.
The plan also seeks to address problems that have been brought to light in recent months since a severe credit crisis began roiling financial markets last August.
That crisis has already claimed as its biggest victim Bear Stearns, the nation's fifth-largest investment bank, which came to the brink of collapse before a government-arranged purchase by JP Morgan Chase & Co.
"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years," Paulson will say in the remarks he will deliver on Monday.
But the plan does seek to address problems highlighted by the current crisis in which the Fed in an unprecedented move has begun making direct loans to securities firms in an effort to shore up a system badly shaken by billions of dollars of losses stemming from sour mortgage loans.
The proposal would allow the Fed, in its new role as "market stability regulator," to dispatch examiners to check the books not just of commercial banks but of all segments of the financial services industry.
The administration proposal would also consolidate the current scheme of bank regulation by shutting down the Office of Thrift Supervision and transferring its functions to the Office of the Comptroller of the Currency, which regulates nationally chartered banks.
The plan recommends that the Securities and Exchange Commission, which regulates stock trading, be merged with the Commodity Futures Trading Commission, which regulates futures trades for oil, grains and various other commodities.
The plan would create a national regulator for the insurance industry, which is now largely governed by the states, and would create a Mortgage Origination Commission to try to address the abuses exposed in the current tidal wave of mortgage defaults.
The role Federal Reserve Chairman Ben Bernanke and his colleagues have been playing to shore up the financial system would be formalized in the administration plan by giving Fed officials greater power to detect where threats might be lurking in the system.
The proposal is certain to generate intense scrutiny in Congress and within the financial services industry, where past efforts to change how regulation is handled have met with fierce resistance.
Many Democrats in Congress are already pushing tougher proposals that would impose much stricter regulation in an effort to crack down on abuses exposed by the current credit crisis.
Sen. Charles Schumer, D-N.Y., said he believed Paulson's plan offered some valid suggestions.
"In broad outlines, we agree with large parts of Secretary Paulson's plan," Schumer, chairman of the Joint Economic Committee, said in a statement. "He is on the money when he calls for a more unified regulatory structure, although we would prefer a single regulator to the three he proposes."
Under Paulson's approach, the long-term goal would be to designate the Fed as market stability regulator and to have a financial regulator who would focus on financial institutions that operate with government guarantees such as providing deposit insurance.
The administration plan, which was first reported by The New York Times on its Web site Friday night, also proposes a business conduct regulator who would be in charge of overseeing consumer protection issues.
The initial reaction from the securities industry was also positive.
"Treasury has delivered a thoughtful and sweeping plan which should provoke intense discussion, debate and potential legislative changes," said Tim Ryan, president of the Securities Industry and Financial Markets Association.
"Our present regulatory framework was born of Depression-era events and is not well suited for today's environment where billions of dollars race across the globe with the click of a mouse," Ryan said in a statement.