On the Hill, Finance Officials Draw Battle Lines on Reform
Saturday, July 25, 2009
The nation's top economic policymakers aired their differences on how to remake financial regulation Friday, exposing disagreements within the government over the Obama administration's planned overhaul.
Treasury Secretary Timothy F. Geithner appeared before the House Financial Services Committee to make the case for the Obama plan, which among other things would establish a new agency to regulate consumer financial products. Then, a panel that included Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila C. Bair and other regulators took the stage, each voicing criticism on elements of the administration's proposal.
The House is preparing to take action on parts of the financial overhaul plan in the fall, and the debate looks increasingly likely to be contentious. The Obama plan faces opposition from the financial industry, Republicans and some centrist Democrats, as well as current banking regulators.
In addition to creating the new consumer protection agency, the administration also wants to give the Fed authority to regulate any financial institution whose size and complexity threaten the broader economy. But members of both parties are increasingly wary of the Fed's concentrated power and would prefer placing more of that authority with an independent council of financial regulators.
The positions of the agency heads are likely to influence lawmakers' decisions, and there were clear fault lines on Friday among the officials testifying.
On the question of creating a consumer regulator, Bernanke argued that the work the Fed does supervising banks complements its work protecting Americans from potentially risky financial products. John C. Dugan, head of the Office of the Comptroller of the Currency, said he was worried that the new law would explicitly give states the right to regulate banks' interactions with consumers, making it harder for national banks to offer uniform products across state lines.
"For the first time in the nearly 150 year history of the national banking system, federally chartered banks would be subject to this multiplicity of state operating standards," Dugan wrote in his testimony, echoing an argument from the large banks his agency regulates.
Geithner seemed to accuse the bank regulators of simply protecting their turf.
"I think it's perfectly reasonable and understandable that the institutions who have this authority . . . are not enthusiastic about giving up that authority," the Treasury secretary said, responding to a question about why he and Bernanke disagree. "They would just defend the traditional prerogatives of their agencies, and I think, frankly, all arguments need to be viewed through that basic prism."
On systemic risk, the Obama plan would make the Fed the primary overseer of companies whose workings pose threats to the larger financial system. It gives the central bank a prime role in responding to a financial crisis. Bernanke said Friday that he thinks there are around 25 firms that could threaten the financial system, the first time he has attached a number.
The administration would simultaneously create a council of top regulators to identify and respond to risks building in the financial system. That council would play a role deciding which firms were sufficiently intertwined to require special Fed oversight. Bair said Friday that she wants more of that systemic-risk oversight authority vested in the council and less in the Fed.
The administration's vision for the oversight council "currently lacks sufficient authority to effectively address systemic risks," said Bair, who has clashed with Geithner and Bernanke over numerous issues in responding to the financial crisis. She said that the council should be chaired by an independent presidential appointee, rather than the Treasury secretary. She wants the agency to set rules and minimum standards for financial institutions, for example.
"Some have suggested that a council approach would be less effective than having this authority vested in a single agency because of the perception that a deliberative council such as this would need additional time to address emergency situations," Bair said.
But she noted that the FDIC, which is overseen by a board, has been able to make rapid decisions when necessary, and said the council "will provide for an appropriate system of checks and balances to ensure that decisions reflect the various interests of public and private stakeholders."
Bernanke, as it happens, is one who has argued that a committee approach to systemic risk could be ineffective in responding to emergency situations.