A major overhaul of the financial system and its oversight in the United States has been released with much fanfare. The revamp, proposed by Treasury Secretary Henry Paulson, has understandably attracted worldwide attention. It is supposed to tackle systemic risks to the stability of financial markets exposed by the subprime mortgage crisis. The housing meltdown has now affected the entire US debt market and is threatening to spread to capital markets around the world. These issues have their origin in the banking and investment deregulation that started in the 1980s but which has accelerated in the past decade in the US. But despite all the talk about major reforms, the proposals are not as far-reaching as they may appear. They call for a greater regulatory role for the US Federal Reserve as 'a financial stabiliser' in times of financial stress - much like the way it has been acting in recent months. But the proposals say it should only regulate when investment companies are posing systemic risks. How might this be judged? Mr Paulson did not explain. This is a time when he and other Washington politicians have been telling overseas market practitioners - and especially sovereign investment funds owned by foreign governments - to disclose their secretive workings and holdings. But Washington is failing in its proposals to tackle an issue it has been preaching to others - transparency, or rather the lack of, in the workings of unregulated financial institutions in the US. Traditionally, US banks were subject to tough regulation. Their deposits are federally guaranteed. But non-banks are left untouched by regulation. They should only be, it is argued, subject to market discipline. Under the guise of free-market rhetoric, the decades-old firewall separating commercial or deposit-carrying banks from non-banks such as investment houses, brokerages, hedge funds and private equities has been dismantled. In the meantime, many US banks have become financial supermarkets with non-bank investment services; some have set up their own hedge funds. Together, these new financial giants have created a shadowy banking system built on derivatives such as repackaged subprime mortgage securities that are free from regulatory oversight. This is compounded by increasingly relaxed accounting rules that allow losses they incur to be hidden from balance sheets by the use of various financial vehicles. Any call for regulation is dismissed, by Wall Street and Washington, as a barrier to innovation and competitiveness. Many governments from emerging countries have been sold on the hype. The Hong Kong government, for example, is always talking about making the city an even greater financial hub, with one eye on developing such 'sophistication'. We should now be glad that we have kept up our prudent banking practices. The Monetary Authority has worked well as an old-fashioned regulatory watchdog. The US Fed's rescue of investment firm Bear Stearns has created a compelling argument that investment houses and other financial institutions - besides banks - should be regulated. But Mr Paulson, a former Wall Street veteran, appears to be using the reform proposals to placate critics rather than doing what is necessary. He gives this game away when he admits the proposals are essentially talking points that will take years to materialise, if they are implemented at all. But the world has an interest in pressuring the US to make its regulatory agencies more effective and its capital markets more transparent. It is time for the US to put its own house in order.