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Major 'shake-up' to financial regulations expected for next year

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“Major” changes to U.S. financial regulations are expected to gain pace by early next year as an expected Democratic-led Congress and administration try to safeguard public money put at risk by the Fed’s recent rescue measures.

Kim Dixon and Karey Wutkowski of Reuters write that regardless of whether Barack Obama or John McCain wins the presidency, major changes would allow a new administration to “distance themselves from the current government and the mess left behind by the credit crisis.”

A 218-page, U.S. Department of Treasury “blueprint” for reform was created in March under George W. Bush’s Republican administration and Treasury Secretary Henry Paulson. But just after its release, according to Reuters, the atmosphere “had been transformed” as the document had been released shortly after the emergency sale of Bear Stearns.

“Banking regulators are now more likely to face criticism for doing too little and being asleep at the wheel rather than being too strict,” Dixon and Wutkowski write. “There is likely to be a shake-up, it just may not be the one Paulson envisioned.”

Where will the major overhauls reside? Reuters reports a general consensus that investment banks should get greater supervision in exchange for access to cash from the Fed. Furthermore, the role of market stability regulator will go to the Federal Reserve.

Massachusetts Democrat Rep. Barney Frank (who is expected to retain his post next year) is requesting Congress establish a “Financial Services Risk Regulator” or to give that duty to the Fed.

Reuters reports the Government Accountability Office has been recently meeting with industry groups, including the American Bankers Association, to compile a report on how best to “evaluate overhaul plans.” The Financial Services Roundtable is currently proposing a draft. Its top priority is to name the Fed as the primary systemic risk regulator and letting investment banks “opt in to use the Fed discount lending window under non-emergency circumstances.” Banks would then be subject to tightened supervision from the central bank.

But there is fear politicians may overreact, Dixon and Wutkowski write:

“Sweeping reforms like those in Paulson’s blueprint, with its three new agencies and amalgamation of several more, could take years.”