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Treasury Secretary Urges Action on Regulatory Structure
The takeover of troubled investment bank Bear Stearns by JPMorgan Chase, combined with recent market turmoil, points out the need for rapid action to update the current financial regulatory structure, Treasury Secretary Henry Paulson Jr. said in a June 19, 2008, speech to the Women in Housing and Finance. "We must dramatically expand our attention to the fundamental needs of our system, and move much more quickly to update our regulatory structure," Paulson said.
According to Paulson, recent market events have highlighted three clear lessons:
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Quick consideration is needed on how to most appropriately give the Fed the authority to access necessary information from complex financial institutions and act to mitigate systemic risk in advance of a crisis.
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Several critical steps must be taken to make sure that market discipline continues to play its vital role to keep the financial system in balance, including strengthening practices and financial infrastructure in the over-the-counter derivatives market and the tri-party repo system and providing greater certainty in winding down failed institutions that are not federally insured depository institutions.
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The emergency authorities of the Fed, Treasury Department and other financial regulators must be re-examined to ensure they are adequate to the roles they are expected to play in a modern, multi-faceted financial system.
"[W]e must limit the perception that some institutions are either too big or too interconnected to fail. If we are to do that credibly, we must address the reality that some are," Paulson added.
Paulson also addressed in more detail the role of market stability regulator that would be given to the Federal Reserve Board under the Treasury Department's Blueprint for a Modernized Financial Regulatory Structure, which was issued in March 2008. Noting that the Fed already is expected to undertake that task when the financial system is threatened, he added that it has "neither the clear statutory authority nor the mandate to anticipate and deal with risks across our entire financial system." The Fed should have greater access to information and greater authority that is applicable to a wide range of institutions in order to fulfill these responsibilities, according to Paulson.
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