The US is not the UK. So the first thing to keep in mind when appraising President Barack Obama’s new regulatory scheme for the financial sector is that it is merely the administration’s wish list, with Congress yet to be heard from. The second is that the blurb on the jacket of an Obama oeuvre — in this case his Guide to Light-handed Regulation — is never an accurate description of its contents.

There is a reasonable chance Obama will get much, although not all, of what he wants. For two reasons: the recent near-meltdown of the financial sector has revealed weaknesses in the regulatory structure, and the president knows that politics is the art of the possible. He knows that every regulator reports to some congressional committee or other, and that congressional barons are reluctant to give up power, which they must if the agency they oversee is eliminated. So, few agencies are to be merged — and not the most important ones.

The president has gone to great lengths to calm fears that he is unleashing draconian restrictions on the freedom of action of financial institutions — reform, yes; revolution, no. “No” to those who argue in favour of the status quo, and “no” to those who want him to go further, perhaps as far as separating commercial banking from investment banking and shrinking banks that are too big to fail. He cannily labels his programme as the most far-reaching since Franklin Roosevelt’s New Deal, and as an example of light-handed regulation. “You set up some rules of the road, ensure transparency and openness, guard against huge systemic risk that will lead . . . government potentially having to step in to avoid a depression, and then let entrepreneurs and individual businesses compete and do what they do,” he said on Wednesday.

Start with the securitisation process, which many believe converted a problem in the mortgage markets into a threat to the entire financial system. Treasury secretary Tim Geithner is eager to get the securitisation process restarted, so that credit will flow more readily to the business community and consumers. So, rather than outlawing the process, he persuaded the president to take the sensible step of requiring those selling these securities to have some skin in the game — retain 5% of the value of such securities. This means the issuer/peddler remains at risk, and is less likely to push dicey paper out into the market, as he had an incentive to do when he profited from issuance fees but did not share in any losses. Here, the administration followed the first principle of good regulation: get the incentives of the private-sector players aligned with the broader public interest.

The administration is also right to call for reform of the rating system to eliminate the conflict of interest inherent in the fact that the agencies get paid by the issuers of securities only if the deal gets done. No surprise, then, that the holy water of AAA ratings was sprinkled liberally over a great deal of paper that proved to be toxic, in some cases fatally so — perverse incentives in action. My calls to the leading rating agency, Standard & Poor’s, were rewarded with a press release professing the agency’s “commitment to working with policymakers and market participants around the world to help get the capital markets back on track”. Whether that includes developing a new system of payment is unclear.

Then there is the Securities and Exchange Commission (SEC), an agency that did not cover itself with glory in the boom years. Obama proposes to transfer the SEC’s power to regulate financial products sold to small customers, including credit cards, student loans and home mortgages, to a new Consumer Financial Protection Agency, and to a beefed-up Federal Trade Commission. Inter-agency squabbles will follow.

Most important, the previously independent Federal Reserve Board will have new powers but will now have to cope with a political overseer. Obama wants the Fed to have broad powers to prevent systemic risk by regulating not only banks, but any financial institutions the failure of which would create such risk. Caught in the net would be GE Capital, the finance arm of GE, which is larger than many banks, and any hedge funds and private-equity groups that might become large enough to fall into the “too big or interconnected to fail” category.

But like other agencies, the Fed would report to a new super co-ordinator, the Financial Services Oversight Council, housed at the Treasury, with “a permanent full-time staff” to provide the several regulators with the information they need to do their jobs and, if Congress approves, powers Obama would prefer to reside in the Fed. There is a lot more, including a proposal that regulators be allowed to seize failing institutions.

The net effect will be an increase in capital requirements — which means lower profit margins for banks; new regulation of non-bank financial institutions; greater power for the Treasury and the politicians who approve its key personnel; and a flood of new regulations as the regulators churn out specific rules to put flesh on the president’s skeletal outline — a fact of which Obama is well aware, and why his attempt to present his proposals as minimally intrusive and “light handed” should be taken with the output of a large salt mine.

Obama claims all of this will allow America “to lead the global economy” down a new path to better regulation. Other nations, however, have different sorts of reforms in mind. The EU has made it clear that it favours tighter regulation of hedge funds and private equity than Obama contemplates, and international oversight of banks, partly to reduce the competitive advantage Britain now enjoys in the provision of financial services.

One thing is certain: international differences in the scope and nature of regulation will remain, presenting opportunities for regulatory arbitrage. Not a bad thing: that will prevent regulators in individual countries from over-reaching, lest they lose business to other, more welcoming jurisdictions.

- Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

stelzer@aol.com