WASHINGTON Financial regulators on Monday announced an information-sharing agreement aimed at better detecting potential risks to the U.S. financial system.
The pact between the Federal Reserve and the Securities and Exchange Commission should enhance regulatory cooperation between the two agencies, allowing them to more effectively carry out their regulatory duties, officials said.
Under the agreement, the two agencies will swap information and cooperate across a number of important areas of common interest, including anti-money laundering efforts, bank brokerage activities as well as on clearing and settling financial transactions conducted by both banks and investment firms.
The Fed is the main regulator of banks, while the SEC oversees Wall Street investment firms.
The two agencies have been working together more closely especially since March with the near collapse of investment firm Bear Stearns. JPMorgan Chase & Co. took over Bear Stearns after a run plunged the troubled firm to the brink of bankruptcy.
The situation, which came about quickly and raised questions about the financial health of both banks and other Wall Street firms, underscored the need for the Fed and the SEC to better combine their resources and share information in an effort to bolster their ability to detect problems.
"I am pleased with this agreement. It formalizes and strengthens the ongoing cooperation between our two agencies to enhance the stability of the financial system," Fed Chairman Ben Bernanke said in a joint statement.
SEC Chairman Christopher Cox also welcomed the pact, saying it should "help ensure that regulated entities receive a coherent message from Uncle Sam."
The two agencies will, among other things, share information on banks' and investment firms' cash and trading positions, proportion of debt to capital, financing resources and risk-management systems.
The agreement comes as regulators are confronted with an increasingly intricate web of complex, often-changing financial products and a wide array of financial players using them in the United States and beyond.
A separate and much broader debate that was spurred by the Bear Stearns debacle and the ensuing financial turmoil left in its wake is what is the best regulatory structure to keep up with a dynamic financial system and modern-day crises. The Bush administration has proposed revamping the U.S. financial system which dates back to the Civil War. That debate is likely to spill over to the next president and the next Congress.
Treasury Secretary Henry Paulson, an architect of the administration's proposed overhaul, said the Fed's and SEC's information-sharing agreement Monday might help shape that future discussion.
It "should help inform future decisions as our Congress considers how to modernize and improve our regulatory structure," Paulson said.
Sen. Charles Schumer, D-N.Y., viewed the pact positively. "In our fractured regulatory system, information sharing and cooperation are paramount and can help increase safety and soundness," he said. However, Schumer said the agreement is not a substitute for a broader regulatory overhaul.
SEC staff began more closely monitoring big investment banks' cash positions and balance sheets after the crisis in subprime mortgage securities broke last year.
Foreclosures skyrocketed on those mortgages made to people with tarnished credit, forcing financial companies to suffer multibillion losses when those investments soured with the housing market's collapse. Credit problems then spread to other areas, posing a major danger to the entire U.S. financial system.
Risks to the financial system intensified in March. The Fed that month began putting its banking examiners onsite at the four biggest Wall Street firms: Goldman Sachs Group Inc.; Lehman Brothers Holdings Inc.; Merrill Lynch & Co. ; and Morgan Stanley.