Tuesday, February 28, 2006



Streamline the financial regulatory framework for God's sake!!

The Federal Reserve can and ought to take lead to bring about radical changes to the current regulatory framework. The current regulatory framework looks at the financial services market along major product lines; investments, banking and insurance services. Within each area, a separate agency tends to the functionally distinct components of any financial services business such as: the product offered providers, the marketplace, exchange mechanisms and delivery. This regulatory framework is turning out to be a bad foundation for a thriving financial services industry.

With financial innovation major product lines in financial services are blending. Banks, securities firms and insurance companies are replicating each other’s. Product-based regulation ignores these realities and is an especially artificial (and inefficient) construct for the regulation of highly integrated organizations that seek to deliver a variety of financial products and services on a seamless basis. Progressive institutions are striving to intermingle the delivery of financial products for the convenience of their customers. But the government insists on deconstructing the exercise for regulatory purposes. In some cases, this forces institutions to restructure their operations just to facilitate a regulatory theory.

Bernanke can make a big difference here. Although customers and providers are progressively less concerned with geographic and product boundaries, the regulatory system still revolves around them. Individual state licensing requirements still frustrate access to regional markets in many instances. The 50-state licensing process poses an entry barrier to the national market. The absence of a single licensing process in the United States curtails the ability of financial institutions to operate nationally. These restrictions no longer have any regulatory justification and the Federal Reserve should work with other agencies to remove them.

Establishing an umbrella license – one that would qualify a provider to offer investment products and insurance in all 50 states – is essential for full nationwide operability. Substantial uniformity must be introduced into the regulatory system if it is to become efficient. Banks, other financial services firms, their customers, shareholders, and the nation's economy as a whole will be deprived of the full benefits of financial modernization until the existing regulatory framework is revamped and Feds should and can contribute to this revamp.

The Federal Reserve has a major stake in the development and maintenance of a smoothly-functioning government securities market, as well as the overall development of the financial markets which can provide substantial benefits to the economy. This revamp and streamlining of regulation could potentially be something that Bernanke can be remembered by and also enable him to fulfill the Fed’s mandate...


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