24 Jul 2009, Mark Pengelly, Risk magazine
In written testimony before the House Financial Services Committee, the heads of the Federal Deposit Insurance Commission (FDIC), the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) all tried to preserve and broaden their remits.
Before their appearances, Treasury secretary Timothy Geithner suggested it was unsurprising the various regulators were trying to defend their roles in front of the committee. "I can see why they would take that position," he said. Nonetheless, the current fragmented regulatory system had failed, he added.
The reform plans entrench the Fed as a systemic risk regulator, giving it authority over all systemically important financial firms, regardless of whether or not they are chartered as banks. The central bank would also be endowed with the ability to hold these firms and their subsidiaries to higher regulatory standards than their competitors.
In his written testimony, Fed chairman Ben Bernanke sought to underplay the Fed's increasing powers under the plan. The central bank already wielded authority as a consolidated supervisor of bank holding companies, he pointed out. As such, increased scope for limiting systemic risk was an "incremental and natural extension" of the Fed's responsibilities, according to Bernanke.
Moreover, using the criteria proposed by the administration, there would be no significant increase in the number of firms subject to Fed oversight. "While the number of additional financial institutions that would be subject to supervision under the administration's approach would depend on standards or guidelines adopted by Congress, the criteria offered by the administration suggest the initial number of newly regulated firms would probably be relatively limited."
Former regulators and politicians have suggested an expanded systemic risk role for the Fed could cause potential conflicts of interest with its execution of an independent monetary policy. But the Fed chief denied this: "There are some important synergies between systemic risk regulation and monetary policy, as insights garnered from each of those functions informs the performance of the other," he said.
The administration's proposals envisage a new Consumer Financial Protection Agency (CFPA), with the power to make and enforce rules governing all consumer financial products, apart from those already regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission. This would mean the Fed giving up its responsibility for consumer protection - something Bernanke opposed. "Both the substance of consumer protection rules and their enforcement are complementary to prudential supervision," he said. The example of subprime mortgages showed that bad financial products could harm both consumers and institutions, he said. Meanwhile, consumer financial protection would be enhanced by the kind of understanding the Fed could provide.
Like Bernanke, comptroller of the currency John Dugan voiced concerns about the CFPA. The proposal could leave too little room for feedback from national bank regulators into consumer financial protection rules, he said. "The proposal would vest all consumer protection rule-writing authority in the CFPA, which in turn would not be constrained in any meaningful way by safety and soundness concerns." This carried the risk the CFPA would enact rules in the interests of consumers that could be detrimental to the safety and soundness of institutions, he said.
While achieving compliance by banks with CFPA rules would be straightforward, applying them to other providers of financial products would be much more difficult, said Dugan. Consequently, the new agency should concentrate on implementing them for non-banks - leaving their enforcement across banks to federal banking agencies. "An agency with a narrower focus, like that envisioned for the CFPA, would be less effective than a supervisor with a comprehensive grasp of the broader banking business," he asserted.
Meanwhile, on the Fed's proposed authority to hold systemically important firms to higher regulatory standards than other firms, Dugan argued they would undermine federal banking regulators.
FDIC chairwoman Sheila Bair echoed Dugan in suggesting the enforcement of CFPA rules be left to federal banking regulators. "Consumer protection issues, and the safety and soundness of insured institutions go hand in hand," she said. Meanwhile, she also called for the FDIC to be granted a seat on the new agency's board - with a reciprocal seat allocated to the CFPA on the board of the FDIC.
The Obama administration's plans include the merger of the OCC and OTS into a single National Bank Supervisor (NBS) - a move that will effectively scrap the OTS. This was vigorously opposed by John Bowman, the agency's acting director. He defended it against widespread accusations of being the most lenient and ineffective financial regulator, saying it had not presided over the worst recent bank failures and had found itself in the position of regulating firms that were considered small enough to fail by the Federal government. Although the conversion of mortgage lender Countrywide from an OCC-regulated bank to a thrift in March 2007 was often cited as an example of "regulator shopping", at least two much bigger lenders had switched charters in the opposite direction, Bowman noted.
Additionally, the new NBS would not be focused enough on smaller institutions, he said. "The OTS is also concerned that the NBS would, particularly in times of stress, focus most of its attention on the largest institutions, leaving mid-size and small institutions in the back seat," he said. The business models of federal banks and thrifts were "fundamentally different enough" to justify the continued existence of two regulators, he claimed.
While the OCC's Dugan supported the idea of merging the two agencies, he said the OCC saw no need for the government to incur the cost of changing the agency's 146-year-old name.
See also: Doubt over Fed's ability to limit systemic risk
UK government moves to resolve supervisory turf war
US regulatory reforms will target the big players
Obama reform plans show no progress on OTC derivatives clearing
US Treasury would support future SEC/CFTC merger, hints Geithner