EDITORIAL: U.S. financial regulation

The United States has enacted new legislation for a sweeping enhancement of its financial regulations aimed at preventing a recurrence of the financial crisis.

We hope this reform will help promote stable economic growth, not just in the United States but also around the world.

Naysayers warn that tighter regulations will choke economic growth. But the failure of the U.S. financial behemoths that dominated the global financial markets to rein in their greed set the stage for the economic crisis.

The case for tighter oversight is strong because excessive deregulation has caused many people to lose their jobs or suffer in other ways.

The new law represents America's biggest financial regulatory reform since the Glass-Steagall Act of 1933, which erected a wall between commercial and investment banking based on the lessons of the Great Depression.

The new law's primary objective is to keep commercial banks, which accept deposits from the public, from making high-risk transactions.

Based on the so-called Volcker Rule, principles proposed by former Federal Reserve Chairman Paul Volcker, the law will restrict banks from investing in hedge funds and trading in speculative financial derivative instruments.

Behind the financial bubbles that led to the economic crisis lay nonbank financial institutions also known as "shadow banks." These institutions expanded their operations by taking advantage of loopholes in the regulations and lax government oversight.

To ensure this will not happen again, the Federal Reserve Board will keep watch on a wide range of financial companies under a unified system of supervision.

This is an important step forward--having regulators oversee the activities of financial institutions that have been largely out of the scope of supervision.

One important task for authorities is to ensure that accurate information is shared by all players in financial markets under stricter regulations.

Financial bubbles continued to grow in the United States partly because accurate information was not disseminated, allowing distortions to accumulate.

The FRB needs to get down to establishing rules to prevent that from recurring.

A key issue for U.S. commercial banks, which will come under the stricter regulations, is how to rebuild their traditional business of lending funds to companies.

The new regulatory setup is designed to pressure commercial banks to go back to their original mission.

But the banks fell deep into speculative trading in derivatives and other risky instruments partly because demand for bank financing fell as large corporations improved their ability to raise funds in capital markets.

The trend was accelerated by excess liquidity and interest-rate deregulation.

Information holds the key for the future of the banking industry. The question is whether banks can discover promising new borrowers by gleaning more in-depth information about companies and technologies than is available through capital markets.

Japan, which experienced its own banking crisis in the late 1990s, does not need to follow the United States and strengthen its financial regulations.

But Japan shares with the United States the same challenge of improving the profitability of banks without allowing them to undermine their role of serving the public interest.

Japan needs to pay close attention to how U.S. banks operate in the new regulatory environment.

--The Asahi Shimbun, July 22