With scandals unfolding, consumer confidence at an all-time low and industries being lit up, trust in the financial system has crumbled and experts are trying to figure out a way to redesign it to give exchange traded funds (ETFs) that mimic the sector a much-needed boost.

A group of very well-known and trusted economic advisers, lead by former Federal Reserve Chairman Paul Volcker, recommends the following steps to restructure the weak financial system, states The Economist. Among their ideas?

• Imposing strict capital requirement restrictions on banks, especially on high-risk proprietary activities – this will force investment banks to focus on client services and not so much on trading, leading to the separation of commercial and investment banks
• Raising the level at which banks are considered to be well-capitalized
• Hedge funds that have pools of private capital that live on borrowed money should have to register with a regulator and provide full transparency
• Bank-like regulation for money market funds, giving assurance of a stable net-asset value
• Set up a mechanism for dealing with non-bank failures and a more refined analysis of liquidity in stressed markets and more robust contingency planning
• Central banks need to have a more vital role in policing such things, need to be vigilant during times when credit is expanding and be more involved in supervising bank safety and soundness
• A formal system of regulation for over-the-counter derivatives
• Urge regulators to force banks to hold on to a significant portion of credit risk when they package loans into securities and sell them on as well as more flexibility in the guidelines for loan-loss reserves
• Rethink certain accounting policies and procedures, like mark-to-market
• Enforcement and rule-making should be in harmony around the globe; after all this is a global crisis

Some ETFs to take a look at that could be influenced if the Obama administration practices what Volcker and his team preaches are the following:

iShares S&P Global Financials Sector Index Fund (IXG): down 17.4% in the last month

PowerShares Dynamic Banking Portfolio (PJB): down 12.8% in the last month

Tags: IAI, IXG, Obama, PJB, Sector ETFs