Blaming much of the current economic downturn on "the unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess," President Barack Obama is proposing a vast expansion of federal regulatory power over financial institutions. The plan includes the creation of two new entities—a Financial Services Oversight Council and a Consumer Financial Protection Agency—as well as two new overseers of banks and insurance firms.

The proposed new regulatory scheme includes new supervisory powers for the Federal Reserve for all financial institutions whose problems could pose a threat to financial stability and a requirement for hedge funds and other pools of private capital to register with the Securities & Exchange Commission. The sweeping nature of the proposals—the widest-ranging changes to the financial regulatory system since the Great Depression—is generating pushback from business interests over some of the provisions.

Obama describes the changes as a balancing of the interests of business and the public. "With the reforms we are proposing today, we seek to put in place rules that will allow our markets to promote innovation while discouraging abuse. We seek to create a framework in which markets can function freely and fairly, without the fragility in which normal business cycles bring the risk of financial collapse; a system that works for businesses and consumers."

Edward Yingling, president of the American Bankers Association, said his group has some “real concerns” about the consumer protection measures.

Regulatory ‘Burden’

“For community banks that had nothing to do with this crisis, this will be massive regulation that will burden them with new costs,” Yingling said as he arrived at the White House for the announcement.

David Hirschmann, president of the U.S. Chamber of Commerce’s capital markets center, said the largest American business lobby group is disappointed with the plan.

“While the administration has made several positive recommendations, we’re concerned that overall, the proposal simply adds to the layering of the system without addressing the underlying and fundamental problems,” he said. “We can’t simply insert new regulatory agencies and hope that we’ve covered our bases.”

Fed’s Role

The central bank would get responsibility to oversee all systemically risky financial firms, a move that aims to eliminate gaps in oversight that contributed to the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc. last year. The Fed would monitor not only banks but large financial companies, such as insurers or hedge funds, whose interconnections in the financial industry mean their failure would endanger the system.