The Bankwatch

Tracking the consumer evolution of financial services

US Treasury regulation framework emphasises systemic risk, institution role, and solvency

Details from the US Treasury home page lists five components for the framework:

Addressing The First Component of Regulatory Reform: Systemic Risk

  1. A Single Independent Regulator With Responsibility Over Systemically Important Firms and Critical Payment and Settlement Systems
  2. Higher Standards on Capital and Risk Management for Systemically Important Firms
  3. Registration of All Hedge Fund Advisers With Assets Under Management Above a Moderate Threshold
  4. A Comprehensive Framework of Oversight, Protections and Disclosure for the OTC Derivatives Market
  5. New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals

There are some new and sensible components in here, e.g.

1) Defining a Systemically Important Firm:In identifying systemically important firms, we believe that the characteristics should include: 

  • The financial system’s interdependence with the firm;
  • The firm’s size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding;
  • The firm’s importance as a source of credit for households, businesses, and governments and as a source of liquidity for the financial system.


2)  Focusing On What Companies Do, Not the Form They Take:

  • These institutions would not be limited to banks or bank holding companies, but could include any financial institution that was deemed to be systemically important in accordance with legislative requirements. These provisions will focus on what companies do and their potential for systemic risk – and no longer on the form they take – to determine who will regulate them.

There are the more obvious things such as more stringent capital requirements and automatic triggering of regulatory enforcement based on tests based on institution solvency. 

… …   triggering determination that 

(1) the financial institution in question is in danger of becoming insolvent;

(2) its insolvency would have serious adverse effects on economic conditions or financial stability in the United States; and

(3) taking emergency action as provided for in the law would avoid or mitigate those adverse effects


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Written by Colin Henderson

March 26, 2009 at 14:53

Posted in Uncategorized

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