EDITORIAL: U.S. financial regulations

The U.S. administration of President Barack Obama has announced a set of proposals to impose tougher regulatory control on banking institutions. These proposals, if implemented, would reverse the trend toward deregulation and consolidation that has been growing in the country's financial sector over the past three decades.

Obviously, a radical overhaul of financial regulation is necessary to prevent a recurrence of the financial crisis that triggered the global recession. We support the policy direction being taken by Obama.

Obama's proposals to rewrite the rules governing the financial industry are intended to force a separation between institutions engaged in traditional banking activities and investment banking firms allowed to make investments at the risk of heavy losses.

Since commercial banks that accept deposits perform important public functions, they would be entitled to various forms of government protection, such as loans from the Federal Reserve Board when they fall into a crisis.

But they would be banned from high-risk operations, such as trading securities for their own accounts and investing in hedge funds or private equity firms. They would have to focus on providing loans to businesses and individuals.

Investment banks, in contrast, would not be subject to these restrictions. But unlike commercial banks, they would not be entitled to public protection.

Obama's proposals would also place limits on the size of financial institutions in proportion to their liabilities and other factors.

The wrenching financial crisis highlighted moral bankruptcy in the financial sector. Many big Wall Street firms took huge and reckless risks in pursuit of quick profits and hefty bonuses. When they suffered enormous losses from investments in risky securities, however, these too-big-to-fail institutions sought and got a taxpayer bailout.

Obama's plan to reform financial regulation reflects his determination to stop their wanton pursuit of money.

Paul Volcker, the former Federal Reserve chairman and outside adviser to Obama, has been promoting the tougher approach with the clear belief that banks should operate in a way that serves the public interest.

The U.S. financial system has gone astray over the years as it became dependent on money borrowed from around the world. Now, it is imperative to correct global imbalances, and the United States needs to restore health in its financial system.

With the U.S. unemployment rate hovering above 10 percent, the American public is harboring a deep-seated resentment against large financial institutions that continue to pay big bonuses to their executives while keeping down their lending.

Under the current circumstances, half-hearted measures to regulate banks are unlikely to win public support.

Coming after the crushing defeat of the Democratic candidate in the recent Senate by-election in Massachusetts, Obama's move to tighten control on banks has been criticized by some as Wall Street bashing to pander to the public.

Rattled by the "Obama shock," U.S. stock markets have fallen sharply.

But it is clear that the United States cannot avoid tackling the question of what kind of democratic rules are needed to regulate the banking sector effectively to avoid a replay of the crisis caused by reckless operations of financial behemoths.

This is a regulatory challenge confronting the entire world, including Japan, which has been following the U.S. lead in deregulating the financial industry.

Serious international debate on financial regulation should take place at such forums as the Group of 20 meetings.

--The Asahi Shimbun, Jan. 26