FACTBOX: U.S. to shake up financial market regulation

WASHINGTON (Reuters) - The United States wants to rewrite its financial regulations after the subprime mortgage crisis pushed Bear Sterns to the brink of bankruptcy. On Thursday, Treasury Secretary Henry Paulson urged that the Federal Reserve be given broader powers over investment banks.

There is already consensus on the need to strengthen regulatory oversight of investment banks, currently supervised by the U.S. Securities and Exchange Commission.

But differences of opinion remain among the various institutions currently involved in supervision on the extent to which that authority needs be consolidated at the Fed, and what enhanced oversight means in terms of tougher capital and liquidity standards, which affect investment bank profits.

THE TREASURY

Paulson said the Fed should have explicit authority to step in and protect the financial system if its stability was threatened. In return, he said it should be granted the power it needs to extract information from investment banks about their operations and to take the steps to prevent systemic risks from developing before the next financial crisis occurs.

But he also emphasized that regulation should not replace market discipline in making sure that the financial system stays in balance.

"For the sake of the system and its impact on the overall economy, we need businesses to manage their affairs without the expectation or presumption that the government will be there if they get into trouble. We need to encourage this by our words and our deeds," he said in the speech.

THE FED

The Fed put taxpayers' money at risk when it financed the rescue of Bear Stearns by JPMorgan Chase & Co, and market participants believe it might do so again if confronted with similar circumstances. But this perceived duty to provide emergency cash support to investment banks is not matched by regulatory oversight, and the Fed wants to close this gap.

New York Fed President Timothy Geithner, the most closely involved of all Fed officials in the Bear rescue, on June 9 called for stronger "shock absorbers" at big firms at the heart of the capital markets and said this would mean higher capital, liquidity and risk-management standards. In addition, he said that the institutions playing a central role in capital markets should all operate under a unified framework. At the moment, commercial banks are regulated by the Fed and face more onerous rules and capital requirements than investment banks, even though they often compete in similar markets.

Fed Vice Chairman Donald Kohn also said regulation needs to respond to the lessons learned from the subprime crisis.

Richmond Fed President Jeffrey Lacker, whose district includes the banking center of Charlotte, North Carolina, separately said that if an investment bank can threaten the Fed that it will file for bankruptcy unless its gets Fed finance, the central bank must get commensurate supervisory powers.

THE SEC

The Securities and Exchange Commission supervises the four largest investment banks -- Goldman Sachs (GS.N), Lehman Brothers LEH.N, Merrill Lynch MER.N and Morgan Stanley (MS.N) -- for liquidity and capital levels.

However, the SEC's supervisory program is voluntary, and its chairman has been urging Congress to figure out which regulator should have oversight over the investment banks and to make that supervision mandatory.

SEC Chairman Christopher Cox, in an opinion piece published in The Wall Street Journal on Thursday, said that changes would require new laws. But, in the meantime, he said the Fed and SEC were cooperating to strengthen the system and could do so indefinitely while the legislative process continued.

(Reporting by Alister Bull and Rachelle Younglai; Editing by Jonathan Oatis)