How financial system should be overhauled? Henry Paulson

In Tuesday article of the Financial Times former U.S. Treasury Secretary Henry Paulson stressed the urgency of altering the existent financial regulation reiterating his previous plan he proposed last March. The article with the speech of ex secretary comes just in time when his successor Timothy Geithner is expected to reveal a plan to set up a so-called systemic risk regulator to monitor and manage risk in the financial sector.

By the moment no single agency has had such a colossal responsibility. And in this regard many lawmakers think that the Federal Reserve will assume this role though some observers doubt if the central bank is capable to cope with the work.

Paulson noted that current financial crisis "has made abundantly clear that our financial system would benefit from a regulator whose focus is on risks across the financial system”. He added that there is support to give the Fed this duty. "It would require the Fed to have access to information from a broader set of financial organizations, including hedge funds and systemically important payment systems."

Besides, he also noted, that such an institution would need "the power to intervene if it concluded that the financial system was at risk." Pointing to dramatic collapse of investment banks Bear Stearns and Lehman Brothers he said that the Congress should find ways to unwind failing non-bank institutions to avoid a repeat of the 2008 crash.

"Any rewrite of financial regulatory authorities must include the explicit federal authority to intervene and wind down a failing non-bank in an orderly manner," he said.

Paulson’s proposal is to integrate the work of two federal bank regulatory agencies: the Office of Thrift Supervision and the Office of the Comptroller of the Currency. In addition he also suggested centralizing scrutiny of mortgage origination; creating an optional federal insurance charter; integrating the Securities and Exchange Commission and Commodity Futures Trading Commission; and continued improvement of clearing and settling processes in over-the-counter derivatives markets.

Financial institutions should be regulated based on what they do and sell, not how they are organized, which is the prevailing premise for U.S. oversight now, he said.