Rewriting Wall Street’s rules

The U.S. Senate passed legislation Thursday that would expand and toughen federal regulations of the finance industry. The American legislators’ goal was to prevent another financial meltdown like the one in 2008 that left the country fighting off the longest recession since the Great Depression.

Once signed into law by President Obama, the bill will set up a federal oversight committee to keep a close watch on business practices and trading of financial companies, with the authority to force spin-offs of derivative operations if they pose a risk to the financial system.

Large banks’ investments in hedge funds are capped at just 3 percent of their net worth, and they can only invest and trade in high-risk and high-return derivatives through their subsidiaries.

The sweeping rewrite of the Wall Street rules aims to restore constraint and security in the financial system so it is not victimized by reckless investments by “too-big-to-fail” banks that led to multibillion-dollar bailouts after 2008.

The financial overhaul won’t stop at Wall Street, but will likely bring change to the global financial system.

American financial institutions have been reaping billions in revenue through cross-border derivatives trading. Blinded by fat perks, their greed drove them to greater risk, generating subprime mortgage delinquencies and the collapse of financial titans like Lehman Brothers. Tougher regulation would likely end foolhardy investment and trading. It could also encourage the financial industry to go on a diet.

Some are calling for similar action with Korea’s finance industry. Some foreign funds may leave if foreign lenders turn discreet on investment. But our problem is that we have too many regulations constraining the system. In our case, we need to relax, not toughen, regulations. Appointments of major bank heads still stir controversy over pressure from government officials.

But our financial industry also has many dangers such as project financing loan insolvencies and excessive household debt swelling beneath the surface. The banks must avoid enlarging themselves. The bigger they become, the more vulnerable they will be to risk.

Nevertheless, they must seek out new challenges. There is no better time than now to make inroads into overseas financial markets. Authorities should support competitive financial companies in their attempt to go global.

But their ventures must be based on a reasonable balance between profitability and security. They must avoid the pitfalls of their American counterparts who only pursued profits. Otherwise, they, too, may find themselves chained down by tough financial regulations.