IMF Suggests Fed As Single Supervisor of MBS Industry
The International Monetary has given a tentative nod to the Federal Reserve as a single regulator for US invesment banks, thrifts and government sponsored enterprises such as Fannie Mae and Freddie Mac.
The IMF also would like to see bundlers of mortgage securities bear some legal liability for the quality of the assets they create.
In a statement on the preliminary findings of IMF staff at the conclusion of a “mission” to the US, the IMF said the US authorities “are to be congratulated on their rapid and innovative responses to a complex crisis, but significant challenges lie ahead. The policy reactions will help minimize disruption not only in the United States but across the world. These actions will need to be supplemented by broader efforts in major countries to foster stability in international financial markets and maintain an open trading system in the period ahead.”
The IMF said “the Treasury blueprint provides a sensible basis for comprehensive reform and simplification of the regulatory system. The extension of the public safety net to primary dealers, notably the major investment banks, after the collapse of Bear Stearns has underlined the importance of effective systemic regulation.”
In addition to revisiting risk weights for capital (including for off-balance sheet entities), enhancing liquidity provisions, increasing transparency, and reforming governance for rating agencies-as suggested by other forums including the Financial Stability Forum and the Fund, the IMF recommends:
- stronger regulation and supervision of investment bank and thrift holding companies, as well as government-sponsored enterprises, by a single supervisor, possibly the Fed;
- closer supervision of liquidity conditions in (commercial and investment) bank-holding companies, with contingency plans that factor-in interruptions of secured financing; and
- counter-cyclical capital requirements and further emphasizing the leverage ratio.
Recent events have highlighted the importance of better consumer protection to realign incentives in the originate-to-distribute model.
“The Fed is appropriately proposing enhanced underwriting standards for lenders of risky loans, and legislation before Congress rightly instigates federal regulation of mortgage brokers when state supervision is insufficient,” the IMF said. “The creation of a business conduct regulator, with responsibilities for mortgage consumer protection, would be an important step forward, as would greater clarity on ratings on structured credit products.”
Holding security bundlers partially legally liable for the quality of assets they create could also improve incentives to produce safer securities.
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