The financial reform plan to be unveiled by President Obama at 12:50 p.m. Wednesday calls for the creation of a council of financial services regulators, chaired by the Treasury but giving sweeping new powers to the Federal Reserve Board. The Treasury's role on the council would be to coordinate policy and identify emerging risks. The Federal Reserve would be designated as the consolidated supervisor of all holding companies of interconnected financial firms. These firms, whose failure would be likely to cause damage throughout the financial system if they failed, are being dubbed "Tier 1" financial firms. All Tier 1 firms would be required to be well-capitalized on a consolidated basis.
All financial firms would be required to increase capital levels and banks would face stricter accounting controls that take a more "forward looking" assessment of expected loan losses. Tier 1 firms would be subject to even higher capital standards. Financial conglomerates that fail could be resolved by the government without going into bankruptcy or being propped up by the government.
The plan also calls for the elimination of the housing-focused savings and loans charter and the merger of the federal government's two largest banking regulators into a single national regulator.
Most of the proposed changes will need congressional approval, although some can be implemented by regulators. The Treasury Department's report will be delivered to Congress Wednesday with specific legislative language to follow in a week or so. Although quick passage is Obama's goal, Congress is already mired in a controversial healthcare reform debate, and a financial overhaul will be nearly impossible to enact in the next few months.
The plan would create a new consumer financial protection agency with broader powers than expected. Not only would the agency have the power to judge whether products are safe for consumers -- such a subprime loans -- but would assume responsibility for nearly all consumer protection rules including truth-in-lending laws and would have the power to "examine" financial institutions. The financial industry has already announce it will fight this provision. - Bill McConnell and Donna Block
