Friday, November 07, 2008

Dodd Will Remain Senate Banking Committee Chair to Guide Legislative Reform of Financial Regulation

Noting that he is remaining chair of the Banking Committee in the upcoming 111th Congress, Senator Christopher Dodd said that the first order of business will be to erect a new financial regulatory regime in order to restore investor confidence in the securities markets. As part of this legislative effort, the committee will execute an ambitious schedule of meetings, briefings, and hearings to understand the strengths and weaknesses of the current regulatory system. The committee’s inquiry and deliberations, assured Dodd, will be guided not by pre-conceived notions, but by core principles that must be reflected in any comprehensive reform effort.

One core principle is that regulators must be strong cops on the beat, rather than turn a blind eye to reckless practices. As SEC Chairman Cox said earlier, voluntary regulation has failed and it is now clear that the financial markets alone cannot be entrusted to police themselves. The consequences for taxpayers are just too great, said Sen. Dodd, to allow significant market actors to carry out their activities in an unregulated or under regulated environment.

Another element of reform is the need to remove negative incentives for regulators to compete against each other for “clients” by weakening regulation. The new financial regulatory system cannot encourage regulatory arbitrage, charter-shopping or a regulatory race to the bottom in an attempt to win over institutions. Regulators should not have to fear losing institutions, and thus the source of their funding, by being good cops on the beat.

Reform legislation must also ensure that regulators are aware of risks that the institutions they supervise are taking and effectively control them, so that they do not imperil the financial system. All institutions that pose a risk to the financial system must be carefully and sensibly supervised. This responsibility could reside with a single regulator or multiple agencies, he noted, but in either case communication and information-sharing among agencies must be streamlined and improved.

A key principle is the need for more transparency in the financial system. Market participants need information about the risks they are taking. And, it is not acceptable to have regulators in the dark about the risks posed to and by the institutions under their watch.

Finally, an important principle is that investor protection must be placed on an equal footing with regulations ensuring the safety and soundness of the financial system. It is now clear that investor protection and economic growth are not in conflict but, on the contrary, are inextricably linked. The crisis teaches that a failure to protect investors can wreak havoc on the financial system.

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