In the aftermath of the economic crisis, there has been a virtual consensus that the financial sector regulatory regimes in the developed countries need a thorough overhaul. However, despite ample evidence to show that it was regulatory inadequacy more than anything else that caused the sub-prime crisis to morph into an unprecedented global economic crisis, attempts to revamp the regulatory regimes have taken time, especially in the United States. The financial sector in the U.S., never comfortable with the prospect of a greater regulatory oversight, has been lobbying hard to dilute any new legislative initiatives. Even its ardent supporters will concede that but for the huge bailouts by government — which temporarily brought some leading names under public ownership — and the record easing of interest rates, the mainline banking system would have not survived the crisis. The recent approval by the Senate of a far-reaching financial regulatory bill on top of the passage of a similar measure by the House of Representatives in December is therefore a landmark event that brings the Obama administration closer to approving a broad expansion of government oversight of the increasingly complex banking system and financial markets. The regulatory overhaul the new legislation will bring about is expected to be the most sweeping one in the post-Great Depression era. The role of the Federal Reserve will be considerably enhanced. Other regulators will get greater role clarity.
The new legislation seeks to check abuses in lending especially in the mortgage sector, and ensure that troubled companies, no matter how big or complex, can be liquidated at no cost to the taxpayers. Each and every financial product/service will be covered by it. Derivatives, so much at the centre of the last crisis, will henceforth be traded through recognised exchanges. A new consumer protection agency to oversee all financial products is to be created. Hedge funds and most other private equity players will be regulated by the Securities and Exchange Commission. Of direct interest to India is the proposal to create “a financial stability oversight council” to coordinate regulatory efforts to identify risks. The developments in the U.S. will be keenly watched throughout the world. To reduce regulatory shortcomings, it has been agreed by the G20 countries, among others, that there will be global coordination but national actions. The U.S. president hopes that the new legislation will ensure greater accountability and responsibility on the part of the regulators and the government. That is an outcome every government will wish for.