By Brady Dennis and David Cho
Washington Post Staff Writer
Friday, February 19, 2010; A13
The chairman of the Senate banking committee is aiming to release a new wide-ranging bill next week that would overhaul financial regulation, including a provision that could for the first time give the Treasury secretary a direct role in the oversight of individual financial companies, according to aides.
Under a proposal from Sen. Christopher J. Dodd (D-Conn.), the Treasury secretary would head a council of regulators charged with monitoring systemic risk across the financial spectrum. It remains unresolved how much power that council would wield. But granting a Cabinet member a measure of regulatory authority would mark a significant departure from the current system, in which independent supervisors are granted autonomy and do not serve at the pleasure of the president.
Lawmakers and government officials have agreed that Washington should be working to identify risky activities that could threaten the entire system -- a job no single regulator had during the lead-up to the financial crisis. There has not yet been broad agreement on how to structure such an entity.
During negotiations with Dodd this year, Sen. Richard C. Shelby (Ala.), the ranking Republican on the banking committee, suggested having the Treasury secretary lead the council. Shelby viewed that structure as preferable, in part because the Treasury secretary has a higher international profile than most regulators. He also views the Treasury secretary as more accountable to Congress.
Dodd could build safeguards into the plan to protect the council from political influence, according to several sources who spoke on condition of anonymity because those details have not been worked out.
But some experts were skeptical of the proposal, even if it were to include safeguards.
"I don't see how you avoid fundamentally changing the role of the Treasury Department as a member of the executive Cabinet," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, which tracks regulatory issues for industry clients. "One would hope the Treasury would exercise its powers in a virtuous way, but this is not what Treasury is nor what it should be."
If the Treasury secretary had a formal supervisory role, that official could use the position "to meet the political exigencies of the moment or for an upcoming election," Petrou added.
She pointed, for instance, to the recent debate over how high bank reserves should be kept. Regulators have been pushing banks to keep capital reserves high to guard against unexpected losses. The Obama administration wants supervisors to ease their requirements to allow banks to lend more to small businesses.
At a recent town hall meeting in Florida, President Obama acknowledged that his administration cannot force regulators to lighten up on banks. "We can just encourage these independent regulators to take a closer look at it," Obama said.Proposal marks a shift
Dodd's new proposal represents a shift for the senator. Last fall, he introduced a bill that would have created a separate Agency for Financial Stability. Dodd envisioned an agency responsible for identifying, monitoring and addressing systemic risks and with the authority to break up large, complex companies if they posed a threat to financial stability. He called for it to be governed by an independent chairman, appointed by the president and confirmed by the Senate, as he said, "to provide insulation from political manipulation."
Shelby and fellow conservatives did not support the idea of a new agency, Senate aides said. So Dodd instead embraced the idea of a council of regulators, with the Treasury secretary at the head.
The blueprint released by the Treasury last year also includes a council of regulators headed up by the Treasury secretary, with the chairman of the Federal Reserve serving as vice chair. This council, however, would have little regulatory power. The body would merely identify emerging risks and advise the Fed about firms whose failure could pose a threat to financial system.
Dodd's plan as described by congressional aides would entail a council with more independence and more authority. Key details -- such as whether it would have power to write rules and bypass existing regulators -- remain largely unresolved.
The issue of systemic risk represents one element in a much broader effort to overhaul the nation's financial regulatory system. Senate lawmakers have yet to settle a number of other issues, including the role of the Fed. Dodd's original proposal would have stripped the Fed of its supervisory powers and left the agency to focus on monetary policy, but Fed and Treasury officials have said it is critical for the central bank to retain supervision over the nation's largest and most complex financial companies.
Lawmakers also continue to wrestle over how best to enhance consumer protections. While Dodd has joined the president and House Democratic leaders in advocating a new stand-alone agency, Republicans in the Senate have called that idea a non-starter. Earlier this month, after months of negotiations, Dodd and Shelby once again broke off talks, largely because of differences over the consumer protection issue.
Last week, Dodd announced that he and freshman committee member Sen. Bob Corker (R-Tenn.) would try to find a bipartisan compromise. The two men left Wednesday and are traveling together through Central America on trip related to their membership on the Senate Foreign Relations Committee. They are scheduled to return Monday.
Meanwhile, Shelby and other Republicans on the committee have proceeded with an alternative draft of the financial regulatory overhaul.