Wednesday, March 04, 2009

President Obama Calls for Complete Overhaul of US Financial Regulation

By James Hamilton, J.D., LL.M.

In some of his strongest statements yet on the coming reform of financial regulation, President Barack Obama said that we have to completely update the1930s regulatory system designed from the last great crisis. He said that, among other things, regulatory reform must deal with a whole series of unregulated pools of capital outside of the current regulatory system. The remarks came at a joint press conference with UK Prime Minister Gordon Brown, who endorsed the President’s remarks.

Regulatory reform must deal with the massive over-leverage and huge systemic risks taken by unregulated, as well as regulated, institutions, said the President. He also pledged to globally coordinate US regulatory reform around a common set of principles, including transparency, accountability, and the regulation of systemic risk.

Mr. Obama’s mention of unregulated pools of capital is an obvious reference to what many call the unregulated parallel banking universe of hedge funds and other entities. Recently, the European Commission endorsed the proportionate regulation of a ``parallel banking system’’ consisting of hedge funds, mutual funds, investment banks, and off-balance sheet vehicles. The guiding principle under which this regulation should be conducted is whether a firm’s activities may have a systemic impact on the markets even if they have no direct links with the public at large.