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Treasury Floats Revised Regulatory Reform Proposals

Thursday, 28 May 2009 | 12:58 PM ET

The Treasury Department has fine-tuned its recommendations on sweeping reform of the financial services industry, CNBC.com has learned.

The latest proposals include giving the Federal Reserve new systemic, or super, regulator status: empowering the FDIC with resolution authority of "too-big-to-fail" firms that threaten the overall economy; a new single agency to regulate state- and federally- chartered depository institutions, bank holding companies and insurance companies; a consumer protection agency that would cover financial products and perhaps predatory lending; and a market monitoring agency combining the Securities and Exchange Commission and the Commodities Futures Trading Commission.

The latest proposals were “floated” to Congress in recent days, according to a source familiar with the recommendations.

It’s unclear if the Treasury proposals have the backing of the White House, which has been working on a regulator reform package under the direction of top advisor Lawrence Summers, according to Congressional and industry sources. Congress has been awaiting details from the White House team for some time now.

The Fed is also believed to be working on its own set of recommendations.

"I don’t think anything is concrete," one senior Congressional staffer said of the Treasury proposals, adding a "number of ideas" had been floated.

Congressional leaders and the President himself have said they want a package of reforms signed into law by the end of the year.

The House Financial Services Committee has scheduled hearings on the issues of consumer protection and executive compensation June 10-11. It's unlikely the White House recommendations will reach Congress by then.

Some of the Treasury proposals now circulating on Capitol Hill appeared in a slightly different form in a group of measures outlined in a departmental report released in late March. What appears to be new is the preference for the creation of a new agency to oversee banks and other institutions.

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The Wall Street Journal Thursday reported a similar proposal, but said the single regulator would “oversee the entire banking sector,” without mentioning insurers or other institutions.

The idea of a systemic regulator—to set capital requirements and essentially look over the shoulder of front-line regulators—has been on the table for some time. The Fed has often been mentioned as a likely candidate to fulfill the role. The current Treasury proposal, however, would be the most explicit recommendation yet.

Moreover, the Treasury has previously said the FDIC would have wind-down authority. That is by no means the only possibility. Some in Congress favor a council concept, which would include a group of regulators, to wind down the operations of big firms, including insurers.

House Financial Services Chairman Barney Frank (D-Mass.) Thursday told CNBC he didn't foresee the creation of a "unilateral bank regulator", saying his preference was for "dual-track regulation", using the existing structure of agencies and additional powers through a "combination of regulators to deal with systemic risk."

Resolution authority would have presumably been used to handle the collapse of Lehman Brothers, Bear Stearns, AIG as well as Fannie Mae and Freddie Mac. It would apply to other investment-banks turned bank holding companies, such as Goldman Sachs , as well as traditional banking companies such as Citigroup and Bank of America .

The reform package is also expected to address greater regulation of hedge funds, derivatives trading and executive compensation.

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