Fed losing support on bank oversight

Key lawmakers looking at other regulators to watch Wall Street

Key Democratic lawmakers are threatening to dismantle the Obama administration's plans to place the Federal Reserve at the heart of efforts to overhaul the financial regulatory system.

When administration officials rolled out their blueprint earlier this year, they argued that the central bank should have responsibility for preventing systemic risks to the economy and regulating the nation's largest, most complex firms. But few on Capitol Hill support the Fed in this role.

Rep. Barney Frank (D-Mass.) chairman of the House Financial Services Committee, who initially had proposed a bill more in line with the administration's plan, signaled his willingness Friday to consider transferring some oversight authority from the Fed to other bank regulators.

Meanwhile, Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, is set to unveil legislation next week that would strip the Fed of much, if not all, of its bank oversight responsibilities.

Both lawmakers also plan to endow a council of regulators with more authority to address risks to the financial system than the administration had originally envisioned, though Frank said in an interview that the Fed would maintain a key role in addressing these threats.

"What you're seeing is a series of political compromises that preserves our ability to re-regulate the system to prevent another round of taxpayer bailouts, but yields to the reality that the Fed is very unpopular," said one Democratic aide. The aide recounted a wonkish joke making the rounds on Capitol Hill: "If the Fed were running for reelection, it would go home to spend more time with its family."

The legislative developments could upend the administration's vision of how Washington should regulate Wall Street in the wake of the financial crisis. Administration officials and some regulators are particularly concerned over the effort to eliminate the Fed's current responsibility for overseeing bank-holding companies, according to sources familiar with their thinking. Frank said he hopes to preserve this Fed power but that the prospect is more tenuous in the Senate.

Administration officials acknowledged that the final package of regulatory reforms enacted by Congress are likely to look markedly different from what was initially proposed in June.

Sen. Mark Warner (D-Va.) announced on the Senate floor Friday that he will introduce legislation next week to establish a systemic risk oversight council "that can spot gaps or opportunities for firms to avoid regulation, and that will not be consumed by other day-to-day responsibilities or protecting its own regulatory turf."

Warner said it would be a mistake to give the Fed that role because "it has obviously failed in that task," and because "its monetary policy responsibilities present potential conflicts, and it has proven incapable of properly regulating large institutions."

He said a strong council would create checks and balances, preventing the emergence of an all-powerful central bank. Warner said he envisions a council comprised of the Treasury secretary, Fed chairman and the heads of the major financial regulatory agencies, along with two independent members, including a council chairman appointed by the president.

In the House, meanwhile, two Democrats on Frank's committee -- Rep. Paul E. Kanjorski (Pa.) and Rep. Ed Perlmutter (Colo.) -- plan to propose versions of legislation aimed at keeping firms from growing so large that their collapse could endanger the financial system. Frank said he supports such measures, but some industry representatives have pushed back hard.

Rob Nichols, president of the Financial Services Forum, criticized Kanjorski's goal of giving regulators power to dismantle large firms, calling it "ill-advised."

"Rather than focusing on size, Congress should be focusing on the concentration of risk and how the firms, big and small, are managing the risk," Nichols said. "These large financial institutions have an important role to play in the global economy."

The Fed currently oversees bank-holding companies as well as about 500 state-chartered banks. Some officials who have been in contact with the central bank say it would wage an all-out fight to keep its regulatory authority over bank-holding companies, which Fed officials view as crucial to judging risks to the financial system.

Frank's current plan calls for merging the Office of the Comptroller of the Currency and the Office of Thrift Supervision. He said "there's no room for negotiation" over his insistence that that the Federal Deposit Insurance Corp. retain its supervisory powers.

Dodd is expected to propose a bill that would fold all current bank supervisory powers -- including those at the Fed and the FDIC -- into a revamped version of the OCC.

The Fed and other existing regulators also stand to lose their consumer protection powers under the creation of a new Consumer Financial Protection Agency, which the administration, Frank and Dodd all support.