Faced with continued market weakness, President Barack Obama's administration is to unveil a plan to bolster the US financial regulatory system, two 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, which is also aimed at giving the system a global reach, 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.
The government will impose stringent capital and liquidity requirements for the largest and most "interconnected" financial firms.
And 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." It was this that had resulted in a market failure that had deepened the bust of the housing sector.
That is why, they said, the administration's plan would impose new reporting requirements on the issuers of asset-backed securities, reduce investors' and regulators' reliance on credit-rating agencies.
The plan would also 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.
Noting that "weak consumer protections against subprime mortgage lending bear significant responsibility for the financial crisis," Geithner and Summers said the administration would offer a stronger framework for consumer and investor protection across the board.
The plan would also include measures to contain and manage future financial crises, they said.
Federal government would have broad authority and "a resolution mechanism" to intervene to forestall a possible collapse of "any financial holding company whose failure might threaten the stability of the financial system," they said.
"This authority will be available only in extraordinary circumstances, but it will help ensure that the government is no longer forced to choose between bailouts and financial collapse," they added.
Finally, the administration plans to work with its international partners to raise international regulatory standards that could be effective in a globalized world, said the article.
Geithner and Summers complained that the current US financial regulation system was "riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk."
They said the country must begin to build the foundation for a stronger and safer system. "Now is the time to act," the officials stressed.