obama foreclosure crisis

War has been declared by interested lobbies against the setting up of a new regulatory agency by the Obama government. The announcement was made on 17th June by the President. However already compromises had been introduced that might defeat the very purpose of the plan.

Nevertheless the plan is advanced in many ways. It has admitted the fact that some entities are too big to fail. This suggests that the institutions that are not banks make up the shadow-banking group. It was they that gave the push for investment and borrowing. But with the new package these institutions will come under the scrutiny and control of the Federal Bank. However, how and by what yardstick these entities would be earmarked as too-big-to-fail remains unclear. Once these are identified undoubtedly they will have to operate under the regulatory cover.

It hardly needs to be stressed that these bodies are not just jumbo as regards size but are diverse in their operations. This led to the complete dismantling by 1999 of the walls of difference between different sections of the financial departments – traditional banking and investment banking as well as insurance etc.

To help the Federal body in tracking and regulating these varied companies the government is planning to set up the Financial Services Oversight Council whose role would be to “bring together regulators from across markets to coordinate and share information; to identify gaps in regulation; and to tackle issues that don’t fit neatly in an organizational chart.”

Over and above this these various entities would from henceforth be subjected to more strict regulations as regards sufficiency of capital as well as liquidity. Here note should be made of the fact that the attempts are not to restrict the size but to stop the surfacing of institutions that are ‘too big to fall’. The attempt would be to prevent the collapsing of large companies.

The package has taken into account the reality of the fact that this may not work in all situations. Thus there is the promise of devising a system that would permit the companies to be unwound in such a way that the system would remain unharmed and the tax payer spared any extra pressure. A “resolution authority” would chalk out “set of orderly procedures” for slicing up or liquidating big and interlinked financial entitles without causing undue damage to the overall economy.

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