By John Poirier and Glenn Somerville
(Reuters) The U.S. Treasury Department will propose on Monday that the Federal Reserve be given sweeping new powers that would make it chief regulator with authority to take actions to ensure market stability.
An executive summary of the proposals published by the New York Times, which Treasury Secretary Henry Paulson will make public on Monday when he unveils a blueprint for regulatory overhaul, says it is vital to fix "regulatory gaps and redundancies" exposed by an ongoing subprime mortgage crisis.
Lax regulation has been widely blamed for permitting a flood of inadequately documented loans to be made during the boom years of a U.S. housing market that has since soured and now threatens to drag the economy into a deep recession.
The proposals say a "market stability regulator" is needed and the Fed best fits that role, suggesting the central bank could use its control over interest rates as well as its ability to provide market liquidity to fulfill its functions.
It proposes that the Fed be given broad authority to require information from all participants in financial markets and a right to collaborate with other regulators in writing the rules that companies and institutions must follow.
NEW FED POWERS
If the Fed finds that the actions of some market participants pose risks for the overall financial system or the economy, "the Federal Reserve should have authority to require corrective action to address current risks or to constrain future risk-taking," the summary said.
Among other recommendations, Treasury suggests merging the Securities and Exchange Commission, the U.S. markets watchdog, with the Commodity Futures Trading Commission that oversees the activities of the futures market.
It also recommends getting rid of a Depression-era charter for thrifts that was intended to make it easier to obtain mortgage loans, saying it is no longer necessary. That would mean closing up the Office of Thrift Supervision and transferring its duties to the Office of the Comptroller of the Currency that oversees national banks.
Treasury officials refused on Friday to reveal details of the proposals but numerous trade groups had been invited to a speech by Paulson on Monday at Treasury and speculation quickly swelled that its long-awaited prescription for streamlining regulation was at hand.
Treasury said it has been working on its proposals since March last year, well before calls for an overhaul began to intensify in the wake of the subprime mortgage crisis that began to wreak havoc last summer on financial markets.
Paulson had signaled some of the direction the proposals would take earlier this week when he said that since the Fed had taken the exceptional step of permitting investment banks access to its discount window for loans -- the first time it has done so for any financial entities besides commercial banks since the 1930s -- it should have some authority over the investment banks.
ACCESS BRINGS RULES
"Certainly any regular access to the discount window should involve the same type of regulation and supervision," he said in a speech to the U.S. Chamber of Commerce.
Another proposal would provide an option for insurance companies to obtain a charter to do business under federal regulation, though it says the current state-based system would continue for any that did not get a federal charter.
Most of the financial services industry in the United States is regulated by federal authorities except insurance, which the states supervise. For years, big insurance companies, however, have been calling for an optional federal charter.
The chairman of the House Financial Services Committee, Democratic Rep. Barney Frank, last week said Congress should seriously consider giving a federal agency the power to monitor all risk in the financial system and act when necessary, regardless of its corporate form.
Frank suggested one possibility would be to empower the fed as "Financial Services Risk Regulator," an idea that Treasury's proposals appear to broadly embrace.
Many analysts and some Treasury officials have said they don't expect recommendations made during the current administration to become law but hope it will be used a springboard for the next resident of the White House.
(Reporting by John Poirier and Glenn Somerville; Editing by Louise Heavens)