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Fragmentation of supervisory responsibility and loopholes in the legal
definition of a “bank” allowed owners of banks and other insured
depository institutions to shop for the regulator of their
choice.Fourth, investment banks operated with insufficient government
oversight. Money market mutual funds were vulnerable to runs. Hedge
funds and other private pools of capital operated completely outside of
the supervisory framework.To create a new foundation for the regulation
of financial institutions, we will promote more robust and consistent
regulatory standards for all financial institutions. Similar financial
institutions should face the same supervisory and regulatory standards,
with no gaps, loopholes, or opportunities for arbitrage.We propose the
creation of a Financial Services Oversight Council, chaired by
Treasury, to help fill gaps in supervision, facilitate coordination of
policy and resolution of disputes, and identify emerging risks in firms
and market activities. This Council would include the heads of the
principal federal financial regulators and would maintain a permanent
staff at Treasury. We propose an evolution in the Federal Reserve’s
current supervisory authority for BHCs to create a single point of
accountability for the consolidated supervision of all companies that
own a bank. All large, interconnected firms whose failure could
threaten the stability of the system should be subject to consolidated
supervision by the Federal Reserve, regardless of whether they own an
insured depository institution.

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effect, our proposals would compel these firms to internalize the costs
they could impose on society in the event of failure.The current
financial crisis occurred after a long and remarkable period of growth
and innovation in our financial markets. New financial instruments
allowed credit risks to be spread widely, enabling investors to
diversify their portfolios in new ways and enabling banks to shed
exposures that had once stayed on their balance sheets.
Throughsecuritization, mortgages and other loans could be aggregated
with similar loans and sold in tranches to a large and diverse pool of
new investors with different risk preferences.Through credit
derivatives, banks could transfer much of their credit exposure to
third parties without selling the underlying loans.

Finally, we propose to harmonize the statutory and regulatory regimes
for futures and securities. While differences exist between securities
and futures markets, many differences in regulation between the markets
may no longer be justified. In particular, the growth of derivatives
markets and the introduction of new derivative instruments have
highlighted the need for addressing gaps and inconsistencies in the
regulation of these products by the CFTC and SEC.Prior to the current
financial crisis, a number of federal and state regulations were in
place to protect consumers against fraud and to promote understanding
of financial products like credit cards and mortgages. But as abusive
practices spread, particularly in

the market for subprime and nontraditional mortgages, our
regulatory framework proved inadequate in important ways. Multiple
agencies have authority over consumer protection in financial products,
but for historical reasons, the supervisory framework for enforcing
those regulations had significant gaps and weaknesses.

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The CFPA should have a stable funding stream, which could come in part
from fees assessed on entities and transactions across the financial
sector, including bank and nonbank institutions and other providers of
covered products and services. We look forward to working with Congress
to create an agency that is strong, robust, and accountable. The CFPA
should be allowed to appoint and compensate officers and professional,

financial and technical staff on terms commensurate with those
currently used by other independent financial regulatory agencies.The
CFPA should have sole authority to promulgate and interpret regulations
under existing consumer financial services and fair lending statutes,
such as the Truth in Lending Act (TILA), Home Ownership and Equity
Protection Act (HOEPA), Real Estate Settlement and Procedures Act
(RESPA), Community Reinvestment Act (CRA), Equal Credit Opportunity Act
(ECOA), and Home Mortgage Disclosure Act (HMDA), and the Fair Debt
Collection Practices Act (FDCPA). The CFPA should be given similar
rulemaking authority under any future consumer protection laws
addressing the consumer credit, savings, collection, or payment
markets. These laws generally contain broad grants of authority to
adopt and enforce rules. But questionable practices may arise in the
gaps between these laws or just beyond their boundaries.

For instance, countries differ on close-out netting rules for financial
transactions or deposits. National regulatory authorities are inclined
to protect the assets within their own jurisdictions, even when doing
so can have spillover effects for other countries. Many countries do
not have effective systems for resolving bank failures, which has
forced policy makers to employ sub-optimal, ad hoc responses to failing
financial firms. As discussed above, the United States already has in
place a robust resolution regime for insured depository institutions.
Moreover, we are proposing to create a resolution regime that provides
sufficient authority to avoid the disorderly resolution of any firm
whose failure would have systemic implications.

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