The United States Treasury Secretary yesterday proposed the most radical shake-up of American financial regulation since the Great Depression. Henry Paulson recommended that banking, insurance and mortgage oversight be centralised and that the Federal Reserve should become a “risk czar”.

Mr Paulson’s 218-page Blueprint for Regulatory Reform suggested that insurance companies and saving and loans institutions, which at present are supervised on a state-by-state basis, should be regulated on a national scale. A new federal body would cover the insurance sector and the Office of Comptroller of Currency, which polices national banks, would oversee saving and loans institutions.

He also proposed establishing a Mortgage Origination Commission (MOC) to regulate home loans on a national basis. However, in what appeared to be a complex dual-regulatory structure, the existing state mortgage regulators would largely continue to operate as they do now but would also report to the MOC. If the MOC were not satisfied with the performance of one of the state enforcers, it would, for example, have the power to halt securitisation of home loans, a move that would cut off a large source of mortgage financing.

Mr Paulson’s proposals, which he said would “require a great deal of discussion and take many years to complete”, received a mixed reaction, although most analysts agreed that they marked an important step in a long overdue shake-up of financial legislation. They said that the work of many enforcement agencies overlapped and had failed to keep pace with innovations in financial markets.

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Adam Compton, an analyst at RCM Investors in San Francisco, said: “Whenever the government tries to simplify something it never seems to work that way. The MOC basically introduces another layer of regulation, though it will at least create new national standards. It’s basically politics, trying to introduce national regulation without treading on states’ feet.”

Chris Whalen, of Institutional Risk Analytics, a Wall Street consultancy, said: “The blueprint is mostly window dressing because it only has a 2 per cent chance of success. It has to get through Congress, where the politicians have to contend with lobbying from many groups who love the regulatory arbitrage.” He added that the existing structure allowed companies to “shop for a regulator” that most suits them.

The blueprint also recommended that legislation be changed to give the Fed the new role of “market stability regulator” with responsibility for policing risk in the financial industry.

Mr Paulson said: “To do its job as the market stability regulator, the Fed would have to be able to evaluate the capital, liquidity and margin practices across the financial system and their potential impact on overall financial stability.

“The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to perserve stability. The Fed will collect information from commercial banks, investment banks, insurance companies, hedge funds, commodity-pool operators.”

Mr Paulson also suggested that the Securities and Exchange Commission should merge with the Commodity Futures Trading Commission.

Regime change

— Give the Federal Reserve Board greater oversight of non-depository financial institutions, including the ability to conduct on-site examinations

— Make the Federal Reserve responsible for financial market stability, replacing its traditional role as supervisor of some banks and bank holding companies

— Establish a Mortgage Origination Commission to regulate homeloans on a national basis

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