Volcker calls for U.S. financial regulation shakeup

WASHINGTON (Reuters) - The U.S. financial regulatory system is outdated and riddled with loopholes, former Federal Reserve Chairman Paul Volcker said on Monday as he offered an overhaul plan to make watchdogs more effective.

Former U.S. Federal Reserve Chairman Paul Volcker moderates a panel discussion at the Bretton Woods Committee annual meeting at World Bank headquarters in Washington May 21, 2014. REUTERS/Jonathan Ernst

The rise of the shadow banking sector - companies that provide credit but are not regulated as banks - demonstrates the urgency of regulatory reform, which failed to take root after the 2007-09 financial crisis, he said.

“The underlying problem is the growth of the non-bank part of the system,” Volcker told Reuters.

“It’s bad enough having all this duplication and inefficiency when everything was concentrated in the banks, but now the nonbanks are more important in credit creation than the banks,” he said in an interview after a news conference.

Volcker, 87, is an influential central banking veteran who lent his name to a central provision in the 2010 Dodd-Frank law to rein in Wall Street. The measure prohibits banks from speculating with their own money, or proprietary trading.

The oversight of banks should be concentrated in one agency, the Prudential Supervisory Authority, rather than in the three bodies that presently share the task, Volcker said.

Under the plan, the Federal Reserve would maintain authority for rule making, and the Federal Deposit Insurance Corp would still be responsible for winding down banks in trouble.

But the third regulator, the Office of the Comptroller of the Currency, would be eliminated.

Volcker also said that the top U.S. risk council - a body that groups the major watchdogs and is often criticized as unwieldy - should be streamlined and hand over some of its tasks to a more nimble group.

The Treasury Secretary would continue to chair the Financial Stability Oversight Council (FSOC) under the Volcker plan, but would no longer have a vote on it, to avoid the appearance of subjecting it to political expediency.

The council would set up a smaller group, the Systemic Issues Committee, which would determine which companies or activities should be subject to regulation, even if they were outside the mandate of the existing watchdogs.

The report also proposed to merge the two main market regulators, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Editing by Matthew Lewis