Earlier this week, Sen. Chris Dodd (D-CT), Chairman of the Senate Banking Committee, released a discussion draft of legislation that will be titled the "Restoring American Financial Stability Act of 2009."  ForumBlog applauds Chairman Dodd and the members of his committee for their diligent work on these critically important matters, and here we provide our reaction to a few of the Senator's proposals.

The draft includes many proposals that address the structural regulatory problems that led to the crisis - such as the creation of an Agency for Financial Stability, which will monitor systemic risks to the financial system.

The need for a systemic supervisor is pressing and real.  Perhaps the most obvious and significant deficiency of our current system is that no agency is charged with assessing risks to the financial system as a whole — the big picture.  However, while Sen. Dodd has proposed that a council of regulators be charged with this task, ForumBlog supports the Federal Reserve as systemic supervisor.  There is merit to Sen. Dodd's council approach, which is why we advocate that the Fed be supported by a council of functional regulators in carrying out its task as systemic supervisor.

Another critical aspect of Sen. Dodd's plan is a strengthening of statutory resolution authority, which will empower the FDIC with the authority to unwind failing financial institutions in a safe, orderly manner.

Sen. Dodd is correct that no institution should be "too big to fail," and enhanced resolution authority will instill the necessary discipline to prevent moral hazard and allow markets to function smoothly.

The 1,136 page draft (summary here) includes many other proposals that seek to reform our system of financial supervision.  As both chambers of Congress attempt to pass much-needed legislation, the Financial Services Forum looks forward to being an active, thoughtful participant in the debate.

To retain its global leadership position, the United States needs a 21st century supervisory framework that ensures safety and soundness; meets the financial needs of American businesses, workers, and investors; ensures consumers and investors are treated fairly; and is efficient, flexible, and responsive to the activities, innovations, and risks of the world's most sophisticated and dynamic capital marketplace.