By Steve Schifferes
Economics reporter, BBC News
Bear Stearns' problems caused shockwaves in global financial markets
The US Treasury's plan to reshape the US financial regulatory system has ambitious goals.
Its aim is nothing less than to "restore confidence in the integrity of the financial system".
And it admits that "the government could have done more to prevent many of the problems from growing out of control and threatening the stability of the financial system".
What is needed is "a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation and is able to adapt and evolve with changes in the financial markets".
KEY US BANKING REFORMS
Tougher capital requirements for big banks
Regulation of securitised assets
Consumer mortgage protection
Powers to take over failing banks
Global regulatory standards
But the political realities have led to proposals which still leave authority divided among many regulators, and have dodged some of the biggest problems in the current system.
The plan for regulation also reveals the tension between the need for tougher regulation on the one hand, and the need for modernising regulation which was the motivation of an earlier series of reforms proposed by the Treasury last year under the Republican administration.
However, the reforms will strengthen the role of the US in relation to its G20 commitments and will give a strong impetus that has previously been lacking to international reform efforts.
Leaving out the hard cases
The Treasury has postponed the question of the future of Fannie Mae and Freddie Mac, the two giant government-sponsored enterprises that are responsible for more than half of all mortgage lending in the US.
They had to be, in effect, nationalised in the autumn as the crisis broke, and still need massive subsidies.
The Treasury merely says that "we need to maintain the continued stability and strength [of these agencies] during these difficult financial times" and proposes to make a further report in 2011.
In addition, the Treasury has lost its fight to regulate the US insurance industry, which will still be overseen by the individual states.
Instead, the Treasury will "support proposals to modernise and improve our system of insurance regulation" and "co-ordinate policy in this sector".
Despite the concerns that the US system of regulation was too complex, President Barack Obama's administration has failed in its attempt to create a single banking regulator, or a single regulator for consumers.
In particular, the Federal Deposit Insurance Corporation, which insures consumer deposits and oversees smaller banks, has won its battle for survival under its aggressive and politically savvy head, Sheila Bair.
The FDIC may also end up playing a key role in liquidating even the biggest banks, if requested by the Treasury.
The Federal Reserve has emerged as the new banking super-regulatory agency.
However, it may face challenges in Congress from those who are concerned about its unelected character.
And the US Treasury still keeps its powers to regulate larger banks, and retains decision-making powers through its role in the new Financial Services Oversight Panel.
Nor is the system straightforward in regard to consumer regulation. The new consumer protection agency will have part of its role - the supervision of mutual funds - carried out by the Securities and Exchange Commission (SEC), and other parts shared with the Federal Trade Commission.
The SEC, in turn, will share powers to regulate derivatives and over-the-counter products - which caused so much trouble in deepening the crisis - with the Commodity Futures Trading Commission, which should "harmonise their approach".
"The proposed is an example of blind faith in government regulation, much as those who want few strings have blind faith in market discipline. The trick is to get regulation right, not mound it like whip cream on a banana split," says Peter Morici of the University of Maryland.
Devil in the detail
A final concern about the proposals is that there is not enough detail in many cases to know how significant the reforms will be. Much will be left to the existing agencies to spell out.
For example, it is not clear how far the regulators will go in enforcing "robust reporting by the issuers of asset-backed securities", such as the sub-prime CDOs that caused so much trouble.
And its plans for further regulation of the credit agencies are also vague as to how they will "strengthen the integrity of the ratings process" and "reduce the use of credit ratings in regulations and supervisory practice".
The detail of the tough new capital requirements that bigger banks will be required to hold are also a critical element in how robust the new system will be.
Some of that will be subject to international negotiation.
And other changes will still be subject to fierce debate within Congress, with the financial sector pressure groups refighting some of the battles they have already lost within the administration.
So the shape of the new system - and its efficiency - may still not be clear until the end of the process.
And given the US political system, that could take some time.
"I'm very sceptical that they can get any significant reform through the Congress this year," said Ethan Siegel, of the Washington Exchange, which assesses laws for institutional investors.