US to boost central bank authority (Roundup)

Mar 31, 2008, 18:20 GMT

A file photograph showing the US Federal Reserve building in Washington, D.C. USA, 07 August 2007. The US Federal Reserve would get broad new powers of regulation over financial institutions under a proposal unveiled by Treasury Secretary Henry Paulson 31 March 2008, in what would be the largest regulatory overhaul since the Great Depression. EPA/MATTHEW CAVANAUGH

Washington - The US Federal Reserve would get broad new powers of regulation over financial institutions under a proposal to streamline oversight in the largest regulatory overhaul since the Great Depression, Treasury Secretary Henry Paulson said Monday.

The 218-page 'blueprint' is designed to better respond to market disruptions and was proposed before the current economic slowdown that began in the housing market and has since spilled into the wider economy.

'Our current regulatory structure was not built to address the modern financial system,' Paulson said in a speech at the Treasury Department in arguing that the Depression-era system must be updated.

The goal, he said, was not to prevent such economic downturns, but to update an outdated structure 'to more effectively deal with inevitable market disruptions.'

The administration hopes to consolidate existing regulatory agencies into three bodies over the next two to eight years that would have oversight over all financial institutions - with one agency overseeing market stability, one dealing with banking regulations and one dealing with business conduct regulations.

The proposal would expand the Federal Reserve's role from implementing monetary policy and providing liquidity to monitoring the broader financial system.

'The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability,' Paulson said.

The proposal comes after the central bank took a series of dramatic steps in the past month to bail out financial firms that have reported more than 200 billion dollars in writedowns over mortgage-backed securities.

'The Fed must have the necessary information to perform its role as it temporarily provides liquidity to non-banks,' Paulson said. 'But it would be premature to assume these institutions should have permanent access to the Fed's discount window and permanent supervision by the Fed.'

Over the short term, the proposal would create a national commission to oversee mortgage origination and charge the President's Working Group on Financial Markets with determining if the government has enough tools and power to address crises.

Paulson's plan would also merge the chief market regulator, the Securities and Exchange Comission, with the Commodity Futures Trading Commission.

He said the proposals, which require congressional approval, should not be implemented until after turmoil on US markets settles down.

'Our first and most urgent priority is working through this capital market turmoil and housing downturn, and that will be our priority until this situation is resolved,' Paulson said.

'Some may view these recommendations as a response to the circumstances of the day,' he said. 'Yet, that is not how they are intended. This blueprint addresses complex, long-term issues that should not be decided in the midst of stressful situations and should not be implemented to add greater burden to a market already under strain.'

White House spokeswoman Dana Perino said the administration will solicit views from Congress in moving forward.

In a related development, Britain and the United States plan a joint Anglo-US financial working group to improve monitoring of the international financial system, the London Financial Times reported Monday.

According to the paper, British Chancellor of the Exchequer Alistair Darling and Paulson agreed last week to set up the group, which is to prepare proposals for better monitoring and regulation of the international financial markets.