Reforming Financial Regulations
December 2, 2008
By Thomas J. Donohue
President and CEO
U.S. Chamber of Commerce
While restoring stability and confidence in the economy is still job one, policymakers must soon turn their attention to another difficult, but necessary, task—reforming, restructuring, and improving our financial system and the regulations that govern it.
It's obvious to everyone that serious regulatory failures played a key role in creating today's economic crisis. Why were financial institutions allowed to over-leverage? Why weren't complex financial instruments like derivatives—which even many financial professionals didn't understand—regulated? Why didn't the appropriate officials keep a closer eye on companies and banks deemed too big to fail?
While there is plenty of blame to go around, we need to focus on the future. We need to determine what reforms are necessary to create a more stable financial system, protect investors, ensure adequate capital is available to businesses and consumers, and help our country compete in the worldwide economy.
The U.S. Chamber and its Center for Capital Markets Competitiveness have examined from top to bottom the rules governing our capital markets. We recently issued a list of principles that should guide any reform efforts.
First and foremost, our regulatory system must promote economic stability, efficiency, and growth. The government must continue to support the availability of credit to stabilize the economy, fuel growth, and keep people working. We must avoid creating a system that will choke off credit, stifle legitimate risk taking, and result in gross inefficiencies. Since capital flows are global, regulations and standards need to reflect this reality.
Second, we need to properly manage systemic risk—risks that could result in catastrophic failures. That means we need increased capital and liquidity requirements. It also means we need to better understand what those risks are and where they are at all times.
Third, both government and investors need better information and more transparency. For example, we need better oversight of the credit agencies that gave their highest ratings to securities backed by risky subprime mortgages. We must also ensure the integrity of financial reporting, which means we need high-quality auditing.
Fourth, we need to take a comprehensive approach. Our current regulatory system is highly fragmented, duplicative, contradictory, and outdated.
Finally, we need strong consumer and investor protections.
Free enterprise entails some risks. No amount of regulation and oversight can protect every investor from every loss—nor should it. By creating a financial system and regulatory structure that encourages legitimate risk taking, discourages unreasonable risks, and puts growth first, we can reinvigorate both Main Street and Wall Street.
For more information, visit www.uschamber.com/ccmc.
As seen in the Examiner: Baltimore, San Francisco, and Washington, D.C., editions