By Li Hong, People's Daily Online

The new regulatory road map for the United States financial system, whose woes triggered the year-long global financial crisis, has been proposed by the Obama administration and deliberated by Congress and the American public.

Its edge will cut into the overlap of regulation on "shadow banking" -- complex packaging or securitization of lending and debts by non-banks, but it spares sterner oversight of rating organizations, and doesn't touch on the interconnecting business model of commercial banking, investment banking and insurance.

The old system failed in fundamental ways, which most economists believe needs a comprehensive and surgical overhaul. Not modest repairs or stitching a few patches could do the job. In the course of reform, the vested interests are sure to employ best surrogates to lobby the authorities in the hope that, once the storm passes finally, the Wall Street will party on.

It makes sense that more home-addressing role will be channeled to the Federal Reserve, and the new plan will make the central bank patriarch of a convoluted chain of regulatory command. In addition to its traditional role in setting interest rates, monitoring money supply and preventing inflation, the Fed is expected to once and awhile look into the balance sheets of America's all financial behemoths, which in most conceptions till today remain "too big to fail".

The Obama plan will give the Federal Reserve the power to regulate any large financial institution it deems systemically crucial to the country's economic whole. Here, an experience from China's central bank in regulation might be of some guide: That a relatively high proportion of a bank's borrowed funds must be kept as reserve or cushion to bet against a possible worst scenario. And, when the economy sizzles with evident bubbles, the Fed will be obliged to deliver financial institutions "window instructions"— directives tailored for individual organizations, just as having been done by the People's Bank of China in Beijing.

Some would say China's lenders or insurance executives might find their positions removable if they refuse to take note of the instructions, because they are appointees of the government as most of the financial organizations are owned by the state.However, The Federal Reserve or the Obama administration could ask for Congressional legislation to cap the compensations of top financial executives or other penalties, if the chiefs don't toe the lines.

When Lehman Brothers fell in September, the aftermath has driven the whole world to know how vulnerable speculative banking and swaps of debt-ridden derivatives were. A global run on the system brought the world economy to its knees. Now, a revised regulatory plan ought to enable the authorities to seize seriously indebted institutions, while not rushing taxpayers' money to bail them out. Maybe, the Federal Deposit Insurance Corporation could be given more power to seize not only traditional banks, but institutions like Lehman and AIG.

And, the Fed should be entitled to institute a specific arm to oversee trading of derivatives. Any packaging of complicated securities must be made transparent, and explained in detail to the investors, approved by regulators, and traded in a system that is public, recorded and checkable. The long held belief that market discipline, combined with innovative ways to reduce risk – namely derivatives like credit default swaps – could mitigate financial danger, has been proved to be untrue. We now know that free market was now self regulating, and the innovations actually amplified risk.

With regard to the rating agencies, which appraise businesses and point to the direction of investment, independent oversight regime might be appropriate. Some have made the case that the rating agencies should not be funded by the people or institutions which engineer and sell complex financial products, but by the people who buy them, and the reasoning is tenable. Here, new rules on conflict of interest should be worked out.