Breakingviews | Fed regulation

Considered view

26 Mar 2008 19:56

Well-Fed watchdog

By Richard Beales

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US Treasury secretary Hank Paulson said on March 26 that his department "will soon release a blueprint for regulatory reform".

He praised the Federal Reserve's actions to date, including its moves to rescue Bear Stearns from bankruptcy. But he said that, for now, "the Federal Reserve's recent action should be viewed as a precedent only for unusual periods of turmoil".

Paulson noted that because the Fed was now lending to investment banks, it was already active at such institutions "at the at the invitation of the SEC". He called on the two regulators and the Commodity Futures Trading Commission to "consider whether a more formalized working agreement should be entered into".

The same day, the UK's Financial Services Authority released a report on its supervision of now-nationalised mortgage lender Northern Rock, finding it had not engaged actively enough with the company or committed enough resources to supervising it.

Hank Paulson seems to agree. The Fed is funding investment banks it doesn’t, strictly, regulate. The Bear Stearns drama shows it’s impossible to disentangle them from “true” banks. The Fed has real levers to deploy, too. It’s well-placed to lead a more coherent regulatory effort.

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