President Barack Obama in a speech today unveils his administration’s proposals for sweeping regulatory reform including allowing increased authority for the Federal Reserve, dismantling the Office of Thrift Supervision and regulating certain aspects of mortgage lending. The proposed regulatory overhaul aims to keep financial institutions honest, transparent and healthy while protecting consumers and the national economy. “That’s our goal,” he says, according to prepared remarks. “To restore markets in which we reward hard work and responsibility, not recklessness and greed — in which honest, vigorous competition in the system is prized, and those who game the system are thwarted.” He proposes the creation of new agency to look out for consumers, impose regulations on what kinds of loan products can be offered and how they’re presented. A regulator keeping an eye on the mortgage lending space would be able to hold mortgage brokers to higher standards, stamp out exotic mortgages with hidden, exploding costs, enforce reasonable disclosure of terms, and hold non-bank originators to the same standards. The proposed overhaul includes sweeping changes to promote free and fair markets and close gaps and overlaps in the regulatory system within and between nations. These changes would bring the operation of financial firms within regulation, dismantle the OTS and require hedge fund advisers to register with the Securities Exchange Commission. They would also mean raised capital requirements among financial firms, regulation of credit default swaps and other derivatives and a requirement that loan originators retain an economic interest in the loans they sell. The administration also proposes granting the Fed new authority to regulate bank holding companies and firms that pose systemic risk and to require these institutions to adhere to stronger capital and liquidity requirements. The proposals inlcude the creation of an oversight council composed of regulators from across the markets that will coordinate to identify gaps in regulation. The overhaul creates a “resolution authority” similar to what the Federal Deposit Insurance Corp. exercises in the insured banking sector. Financial regulators missed the forest for the trees, so to speak, in focusing on individual firms outside the context of the whole system. As a result, some institutions grew so large and significant as to signal far-reaching shockwaves through the system if one firm were to fail. Obama proposes requiring regulators to consider the stability of the whole financial system when addressing individual institutions. “We should not be forced to choose between allowing a company to fall into a rapid and chaotic dissolution or to support the company with taxpayer money,” Obama says. “That is unacceptable. There is too much at stake.” Write to Diana Golobay.

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