Treasury official urges quick action on financial regulatory reform

An overhaul of the regulations that govern Wall Street is urgently needed, and a delay of legislation will only increase uncertainty and undermine growth as markets rebound, a Treasury official said Monday. 

There needs to be "a stable and predictable financial system, one where all financial service providers are held to the same minimum federal standards," Michael Barr, assistant Treasury secretary for financial institutions, told community bankers Monday. 

Barr advocated reforming securitization markets, credit rating agencies and the multi-trillion derivatives market. He also suggested subjecting interconnected financial firms to comprehensive capital and supervision standards while closing loopholes so no firms escape oversight.

"We have a chance to enact the strongest, most important financial reforms since those that followed the Great Depression," he told the Independent Community Bankers of America.

Besides building confidence in the financial system, reform could trigger more investment in innovation and new technologies that was woefully underfunded before the financial crisis as firms poured trillions into the housing market.  

"We need reform, and we need to get it done now," he said.  

Barr pointed to the "shadow banking system" as a harbinger of the 2008 financial meltdown. Those companies acted like banks but aren't regulated, weren't disciplined, took on risk, pressured traditional banks to engage in unsustainable practices and grew nearly as large at the traditional financial system, he said. 

"We need to bring derivatives trading out of the dark," he said. 

"We cannot rely on the same failed strategy and the same failed regulatory system going forward." 

Moving forward quickly on reform is important because of the devastating effects of the financial crisis, which include a massive loss of jobs, failure of small businesses and a contraction of lending.

"Weak and fragmented regulation and enforcement has been a recipe for a vicious cycle of deteriorating standards," Barr said. 

Without reform, the system is still vulnerable to future crises, and the "expectation that some firms are too big to fail will survive, and risk will build up again in parts of the financial system where regulation authority is lacking," he said. 

Opponents of reform who are slowing it down or trying to weaken legislation "are not speaking to the real interests of community banks, small businesses or American families," he said. "Opponents are seeking to protect vested interests on Wall Street that have benefited from the flows in the regulatory system and want to perpetuate those flaws." 

Senate Democrats and Republicans are still trying to work out a deal on a financial regulatory reform bill with a cloture vote planned today for 5 p.m.