Too Big to Fail Firms to Get Regulatory Makeover

October 26, 2009

(ChattahBox)—After implementing new policies on executive compensation last week, the Obama administration and lawmakers in Congress are next setting their regulatory sights on the problem of too big to fail firms. According to the New York Times, the Treasury Department and Congress plan to introduce new legislation, as early as this week, making it easier for the government to seize control of troubled non-bank financial institutions.

The new legislative measures would also impose new rules on firms making it more costly for a large firm to fail, whose failure could put the nation’s economic system at risk.

Representative Barney Frank, (D-MA) the Chairman of the House Financial Services Committee, will introduce the legislation in concert with the Treasury secretary, Timothy F. Geithner.

The new regulations would require institutions to create a public plan on the firm’s procedures in the event of financial failure. The rules would also force institutions to hold more money in reserve and make it harder for them to borrow too heavily against their assets.

The rules are designed to both protect the nation’s economy from a repeat of the collapse last fall, and to make it easier for the government to step in and seize control of failed financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution. During the collapse of Wall Street last year, current rules didn’t allow the government to take control of non-bank financial institutions, like AIG, forcing the government to bail out the risk-taking firms.

Michael S. Barr, assistant Treasury secretary for financial institutions said, “These changes will impose market discipline on the largest and most interconnected companies.”

Edward L. Yingling, president of the American Bankers Association, says the new regulations would impose consequences for risky behavior leading to failure, while at the same time leaving the basic financial structure intact.

“Of course you want to set up a system where an institution dreads the day it happens because management gets whacked, shareholders get whacked and the board gets whacked. But you don’t want to create a system that raises great uncertainty and changes what institutions, risk management executives and lawyers are used to,” says Yingling.

Treasury secretary, Timothy F. Geithner is scheduled to appear before Rep. Frank’s panel on Thursday to support the new regulations.



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