Volcker Alliance calls for urgent reform of nation’s financial regulatory structure

By John M. Pachkowski, J.D.

Noting that the foundational elements of the nation’s financial regulatory system, which have been in place since the 1930s, have become “fragmented, outdated, and ineffective,” the Volcker Alliance has released a report outlining recommendations for “much-needed reform of the financial regulatory structure and emphasizing the urgency of implementing such reforms.”

 
The Volcker Alliance is a non-partisan, non-profit organization founded by former Chairman of the Federal Reserve Board Paul A. Volcker to address the challenge of effective execution of public policies and to help rebuild public trust in government.
 

Outpaced. The report, entitled “Reshaping the Financial Regulatory System: Long Delayed, Now Crucial,” noted that the regulatory system has not kept pace with the “significant transformation” that has occurred in the financial system over the past few decades. Examples of these changes included:

• a concentrated banking system consisting of a handful of extremely large, exceedingly complex, globally active, and highly diversified institutions, with huge trading books and even, in some cases, ownership of industrial assets such as coal mines, oil tankers, and power plants;
• the emergence of shadow banking, as a bigger part of the whole financial system; and
• equities markets that have become fragmented, more complex, and less transparent, in part as a result of technological advances, with increasing participation from unregulated entities, such as high-frequency trading firms.

Other factors cited that necessitate reform included:

• interagency jurisdictional conflicts that have “often resulted in delays or inaction on critical matters”;
• no single agency having a comprehensive understanding of the risks in the financial system, as each agency remained focused only on its area of supervision; and
• increased opportunities for regulatory arbitrage.

Keeping pace. The reforms proposed in the report are aimed to create a simpler, clearer, more adaptive, and more resilient regime that would have a mandate to deal with the financial system as it exists now and would be capable of keeping pace with the evolving financial landscape.

Guiding principles. In making its recommendations, the report noted that it “remains true to certain core organizational principles that are designed to ensure a balanced, comprehensive, independent, and effective regulatory framework aimed at achieving sustained financial system stability.”

Following these guiding principles, the report makes three recommendations for reform:

1.  oversight and surveillance;
2. supervision and regulation; and
3.  investor protection and capital market conduct.

“Step up” to debate. Commenting on the report’s release, Paul Volcker noted, “Even as America continues its long climb back from the financial crisis, it is all too clear that the Federal financial regulatory system needs restructuring to deal effectively with the threats to financial stability. We urge Congress, the administration, existing regulatory agencies, and financial institutions themselves to step up to the needed debate and set out an agreed framework for reform suitable for the 21st century.”

Epilogue. The Volcker Alliance report is just the latest reform measure to be issued. The report noted that there have been more than 25 official reform proposals since World War II, spanning Democratic and Republican administrations; virtually none have met with significant success. Opposition from various stakeholders that benefited from the status quo has been cited as the major impediment to these historic reform efforts.

The last two government-issued reform measures were issued in 2008 and 2009. The Treasury Department issued its “Blueprint for a Modernized Financial Regulatory Structure” in March 2008. The Blueprint presented a series of “short-term” and “intermediate-term” recommendations that the Treasury Department believed would have immediately improved the U.S. regulatory structure. The Blueprint also presented a conceptual model for an optimal regulatory framework.

The Obama Administration issued its own reform initiative “Financial Regulatory Reform: A New Foundation” in June 2009. This initiative outlined the president’s plan to restructure the regulation of the U.S. financial services system. Many of the recommendations formed the basis of the Dodd-Frank Act.

Following the release of the reform report, Richard H. Neiman and Mark Olson, Co-Chairs of the Bipartisan Policy Council’s Regulatory Architecture Task Force applaud the Volcker Alliance’s report. Neiman and Olson said, “The alliance’s report is a thoughtful contribution to several critical issues that were not included in the Dodd-Frank Act and other efforts at post-crisis financial reform. Many of its conclusions echo those advanced by BPC to streamline and strengthen the U.S. financial regulatory architecture.” They added, “Dodd-Frank made important progress, but it missed a major opportunity to reform a financial regulatory structure that has been cobbled together in reaction to various crises over the past 150 years, without a coherent plan. It is time for policymakers to have that debate, which should include hearings in Congress to investigate options to improve the U.S. financial regulatory structure.”

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