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In effect, our proposals would compel these firms to internalize the costs they could impose on society in the event of failure.The current financial crisis occurred after a long and remarkable period of growth and innovation in our financial markets. New financial instruments allowed credit risks to be spread widely, enabling investors to diversify their portfolios in new ways and enabling banks to shed exposures that had once stayed on their balance sheets. Throughsecuritization, mortgages and other loans could be aggregated with similar loans and sold in tranches to a large and diverse pool of new investors with different risk preferences.Through credit derivatives, banks could transfer much of their credit exposure to third parties without selling the underlying loans.

Filippo Cardone Fragmentation of supervisory responsibility and loopholes in the legal definition of a “bank” allowed owners of banks and other insured depository institutions to shop for the regulator of their choice.Fourth, investment banks operated with insufficient government oversight. Money market mutual funds were vulnerable to runs. Hedge funds and other private pools of capital operated completely outside of the supervisory framework.To create a new foundation for the regulation of financial institutions, we will promote more robust and consistent regulatory standards for all financial institutions. Similar financial institutions should face the same supervisory and regulatory standards, with no gaps, loopholes, or opportunities for arbitrage.We propose the creation of a Financial Services Oversight Council, chaired by Treasury, to help fill gaps in supervision, facilitate coordination of policy and resolution of disputes, and identify emerging risks in firms and market activities. This Council would include the heads of the principal federal financial regulators and would maintain a permanent staff at Treasury. We propose an evolution in the Federal Reserve’s current supervisory authority for BHCs to create a single point of accountability for the consolidated supervision of all companies that own a bank. All large, interconnected firms whose failure could threaten the stability of the system should be subject to consolidated supervision by the Federal Reserve, regardless of whether they own an insured depository institution.

The financial crisis highlighted the need for an ongoing mechanism for cross-border information sharing and collaboration among international regulators of significant global financial institutions.The current financial crisis has affected banks and nonbank financial firms without regard to their legal structure, domicile, or location of customers. Many of the ailing financial institutions are large, have complex internal structures and activities, and operate in multiple nations. The global financial system is more interconnected than it has ever been. Curr ently, neither a common procedure nor a complete understanding exists of how countries can intervene in the failure of a large financial firm and how those actions might interact with resolution efforts of other countries.

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We propose that federally chartered institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions. This would restore a fairer and more measured approach to the roles of the states with respect to federally chartered institutions. We also propose that states should be able to enforce these laws, as well as regulations of the CFPA, with respect to federally chartered institutions, subject to appropriate arrangements with prudential supervisors. With respect to state banks supervised by a federal prudential regulator, the CFPA will be the primary consumer compliance supervisor at the federal level. Maintaining consistency among fifty states’ supervisory and enforcement efforts will always remain a significant challenge, but the CFPA’s concurrent supervisory and enforcement powers should place it in a position to help. The CFPA should assume responsibility for federal efforts to help the states unify and strengthen standards for registering and improving the quality of providers and intermediaries.

These agencies, in turn, should be required to refer potential compliance matters to the CFPA and should be authorized to take action if the CFPA fails to act; the same should hold for state supervisors of state-chartered institutions.The Community Reinvestment Act (CRA) is unique among the panoply of consumer protection and fair lending laws. The CFPA should maintain a group of examiners specially trained and certified in community development to conduct CRA examinations of larger institutions.The CFPA should also have supervisory and enforcement authority over nonbanking institutions, although the states should be the first line of defense. In its discretion, the CFPA should exercise the full range of supervisory authorities over nonbanking institutions within its jurisdiction, including supervision, information collection and onsite examination. The CFPA should also have the full range of enforcement powers over such institutions, including subpoena authority for documents and testimony, with capacity to compel production by court order.

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