Next Front: Bank Regulation

By GREG HITT

WASHINGTON -- President Barack Obama fired the opening salvo in a sweeping effort to overhaul supervision of the shaky U.S. financial system, calling Wednesday for legislation that will likely bring greater government scrutiny of Wall Street.

At an Oval Office gathering of his economic team and top lawmakers of both parties, Mr. Obama asked Congress to move swiftly to create a new regulatory structure for 21st-century markets. He said the market turmoil that has gripped Wall Street since last year "was not inevitable," and urged that steps be taken to protect investors and consumers while holding executives accountable for risky behavior.

"The choice we face is not between some oppressive government-run economy or a chaotic and unforgiving capitalism," Mr. Obama said. "Rather, strong financial markets require clear rules of the road, not to hinder financial institutions, but to protect consumers and investors and ultimately to keep those financial institutions strong."

The meeting opened a new front in the young administration's efforts to mend the troubled U.S. economy. The regulatory overhaul is likely to be more complex than the administration's early efforts to stimulate the economy and bail out the banking system. It will almost certainly result in a new structure of oversight that inserts the federal government more deeply into the economy.

At the meeting Wednesday, Mr. Obama was short on specific details and instead offered a set of broad principles he would like to see expressed in legislation.

Among other things, Mr. Obama said "financial institutions that pose serious risks -- systemic risks -- to our markets should be subject to serious oversight by the government." He said U.S. taxpayers "should be assured" that the Federal Reserve, which is acting as a lender of last resort in many cases, "understands the institutions it insures and actively monitors them to keep their risk-taking in check."

The president said the overhauled regulatory structure "must be strong enough to withstand both systemwide stress and the failure of one or more large institutions."

Mr. Obama also called for greater transparency, more-uniform supervision of financial products, and "strict accountability" for market players who engage in risky behavior. "Executives who violate the public trust must be held responsible," the president said.

Other topics that will likely be tackled by Congress as part of the effort include expanding regulation to hedge funds and exotic financial instruments, such as credit-default swaps; beefing up consumer-protection laws; and perhaps merging or killing off ineffective regulatory agencies.

The administration is seeking a delicate balance between responding to populist anger against big Wall Street banks and knowing that a properly functioning financial system is vital to any economic recovery. Banks, meanwhile, aren't in a strong position to resist plans for greater government scrutiny of their business.

House Financial Services Chairman Barney Frank (D., Mass.) said both houses are going to start working on the overhaul soon and he expects an effort to reach an "agreement in concept" on a regulatory plan before Mr. Obama leaves for the Group of 20 meeting in April.

Still, the legislation could take months to wend through Congress. Rep. Frank said he expects the effort will be done in stages, with action first on a bill that will empower a regulator, likely the Federal Reserve, to regulate risk across the financial system.

"It's either the Fed or you start from scratch," Mr. Frank said.

Write to Greg Hitt at greg.hitt@wsj.com