U.S. Financial Sector Likely Faces Overhaul

Stock market graphsThe ink is barely dry on the health care reform act and another major overhaul is on the legislative agenda in Washington. President Obama is pushing for financial reforms he says are necessary to prevent a repeat of the meltdown of 2008–2009. A financial regulation bill is working its way through Congress, with Democrats and Republicans alike in favor of some kind of revamped regulatory framework. Some political observers expect a bipartisan compromise will be achieved.

On April 22, Obama addressed a gathering in New York City just blocks from Wall Street, which is the target of many reforms. Insisting that “we learn the lessons of this crisis,” the president urged reforms including: creating an independent consumer protection agency; reining in risky investment activities on the part of banks; requiring financial firms to set aside sufficient capital, or reserves, to remain solvent during recessions; and giving investors and shareholders greater say in how much executives of financial firms are paid.

A major goal of the reforms is to make financial firms—not taxpayers—bear the cost of any future “bank bailouts.” To keep banks from becoming “too big to fail,” and thus putting the entire financial system at risk, the proposals would limit their size. Regulations would specify how and when the government would take over a firm on the verge of failure. To identify and regulate firms so large and interconnected that their collapse could endanger the entire financial system, a new oversight council or existing agency like the Securities and Exchange Commission or the Federal Reserve may need more regulatory powers.

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