Faced with continued market weakness, President Barack Obama's administration will unveil this week a plan to bolster the US financial regulatory system and give it global reach, top presidential economic aides said.
Treasury Secretary Timothy Geithner and chief White House economic adviser Lawrence Summers gave a broad outline of their plan in an op-ed piece in The Washington Post.
They did not say when exactly their plan would be made public, but media reports suggested this could come as early as Wednesday.
"Reassuring the American people that our financial system will be better controlled is critical to our economic recovery," the two officials wrote. "We will lead the effort to improve regulation and supervision around the world."
The five-point plan aims to create "a more stable regulatory regime that is flexible and effective" while guarding the system "against its own excess," Geithner and Summers pointed out.
Under the initiative, the government will impose stringent capital and liquidity requirements for the largest and most "interconnected" financial firms.
In addition, all large financial institutions whose failure could threaten the stability of the system will be subject to supervision by the Federal Reserve.
The government will also establish "a council of regulators" with broader coordinating responsibility across the system.
Geithner and Summers further argued that the dramatic growth in financial activity outside the traditional banking system, such as the spread of asset-backed securities, has led to "an erosion of lending standards," resulting in a market failure that deepened the bust of the housing sector.
That is why, they said, the administration's plan will impose new reporting requirements on the issuers of asset-backed securities, reduce investors' and regulators' reliance on credit-rating agencies, and require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.
Financial instruments known derivatives will be subject to regulation, their dealers will be supervised by the government, and regulators "will be empowered to enforce rules against manipulation and abuse," the officials said.