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Schapiro: "Building a Stable and Efficient Financial System"

Last week, at the ICI's General Membership Meeting in Washington, DC, SEC Chairman Mary Schapiro outlined her thoughts on the future of financial regulation. Noting that the focus of any reform of the system of regulation for the financial system "must take as its touchstone the protection of individual well-being," Schapiro also said that well regulated financial markets must continue to "accommodate lively competition for capital," and should foster transparency and investor confidence in a level playing field for all market participants. Schapiro envisions a reformed regulatory system that includes:

  1. An entity responsible for the regulation of the markets for investment capital. Schapiro stressed that the independence of the SEC as the country's capital markets regulator has allowed it to "build and expertise and a culture of investor protection. She also stressed that integration is key to they effectiveness of the SEC as a market regulator:

    In addition, any capital markets regulator must be integrated. Necessary components of capital markets regulation include regulation of the processes by which investments are offered and sold; of the intermediaries who sell investment products or who offer advice; of the disclosures that must be made by those whose securities trade in the capital markets; of the exchanges or other facilities on which investment products are traded or through which they are cleared and settled. And of course, all these areas must be closely monitored, and the rules must be aggressively enforced.
  2. An entity (or entities) responsible for regulating banking institutions. Chairman Schapiro said, when it comes to banking and market regulators, she believes that:

    Different regulators appropriately have different perspectives. It is important, I believe, to preserve these multiple perspectives. That is why I think it is useful to maintain the separation between market regulation and banking institution regulation. The best solutions come from the clash of legitimate, varying viewpoints.
  3. An entity responsible for monitoring and averting risks to the financial system as a whole. Schapiro stated that there is a need for a single goverment entity "whose responsibilities include the monitoring of our financial system for system-wide risk, with the tools to forestall emergencies." She also said that she believes this proposed risk regulator should take the form of:

    . . . a hybrid as FDIC Chairman Sheila Bair proposed this week: a single regulator for systemically significant firms coupled with a systemic risk council to provide macro-prudential oversight of risk. Regardless of the form, it should have access, largely through the functional regulators, to sufficient information to provide a view of the financial system as a whole. And it should have sufficient power to direct prudential regulators to strengthen capital requirements and to direct institutions they regulate to reduce leverage as circumstances require.
  4. An entity responsible for resolution of troubled institutions. In addition to the responsibilities for monitoring systematic risk, Schapiro also believes that the single risk regulator should have the ability to wind up financial institutions that are no longer able to function.

The full text of Chairman Schapiro's May 8, 2009 remarks is available at: http://www.sec.gov/news/speech/2009/spch050809mls.htm