OTS head hits back at OCC merger plans

The US Office of Thrift Supervision has come out in staunch opposition to proposals by the Obama administration to merge the regulator with the Office of the Comptroller of the Currency, calling the efforts “an attempt to pound a square peg into a round hole”.

Testifying before the House Committee on Financial Services yesterday, acting director of the OTS John Bowman hit out at the merger plans just minutes after a testimony from John Dugan, comptroller of the currency, in which he confirmed his agency’s full support to “effectively merge” the OTS and the OCC. 

“I do not believe the OTS is the correct regulator for systemically important conglomerates. The transition costs for thrifts to a different holding company regulator would be an unnecessary burden at a difficult time [and] there is no efficiency to be gained by merging regulatory agencies that do not fit together,” said Bowman. “Consolidating agencies would take years, cost millions of dollars and generate upheaval in the day-to-day supervision of financial institutions. All this would be done to achieve a forced fit of fundamentally different agencies that regulate fundamentally different institutions, with no efficiencies or other benefits for taxpayers, consumers or the industry,” he added.

Following the testimony, committee chairman Barney Frank asked Dugan whether he also opposed legislative proposals to replace the OCC and the OTS with a new National Bank Supervisor agency. But Dugan reiterated the OCC’s position that “we fully support the proposal that that kind of consolidation proceeds”.

The exchange came during the second of two panels testifying before the committee on the progress of regulatory reform plans first unveiled on June 17. To date, only elements pertaining to more stringent regulation and central clearing of over-the-counter derivatives have reached the legislative language stage.

Despite this, only a smattering of questions congressman posed to Treasury secretary Timothy Geithner pertained to the overhaul of OTC derivatives markets. Representative Maxine Waters grilled the secretary on the failure to include an outright ban on naked CDS positions.

“We allowed the SEC to ban short selling last year and it created new rules to significantly limit naked short selling, the rationale being that short selling was improperly used to speculate in financial stocks. The same can be said about a company’s credit default swap (CDS) price. The current proposal does not have any limits on naked CDSs. Why shouldn’t we give the SEC the authority to ban CDSs?” she asked.

Geithner responded that the proposed changes give the SEC and CFTC new and unprecedented authority to prevent manipulation in the derivatives market, but insisted such powers would be sufficient to curb speculative abuses of CDS positions. “I don’t think banning what you call naked CDSs is necessary or appropriate to that objective, but we do think it is critically important to give [regulators] enforcement authority and the tools necessary to deter and prevent manipulation in the derivatives market,” he said.

Geithner faced a number of specific questions around plans to indentify and categorise financial institutions that present a systemic risk as 'tier-one financial holding companies'. While the intention of the distinction is to single out such firms for higher capital charges and restrict leverage, congressmen are concerned such a delineation will be interpreted by creditors as a signal that tier-one firms are too big to fail, the implication being they will automatically receive government assistance should they approach collapse.

“There was talk about a list being established by the federal regulators of the institutions that are systemically important. I think that is a mistake. Those who proposed it in good faith thought it would be a scarlet letter on those institutions but others have proposed it would be a badge of honour,” commented Frank.

These concerns were also voiced by the leading Republican on the committee, ranking member Spencer Bachus who tore into plans to recast the Federal Reserve as the primary regulator of systemically significant firms. 

[The Obama] plan established the Federal Reserve as the systemic risk regulator despite the fact the Fed has historically done a poor job of identifying and addressing systemic risk. It tasked the Fed with identifying a class of systemically risky firms deemed too big to fail, and then compounds this mistake by creating a so-called resolution authority that will promote continued taxpayer funded bail-outs of these institutions, rather than unwinding and shutting down their operations,” Bachus charged. “You say the identification of a firm as tier one will not convey a government subsidy, but isn’t it a fact that that identification tends to imply to creditors that the firm has been determined to be so important that it can’t fail?

Geithner conceded that the Treasury is “deeply worried about that risk or any regime that creates the expectation that the government will be there if you screw things up,” but he assured the committee the distinction is designed to make those institutions subject to tighter leverage limits and more conservative cushions of capital and liquidity, precisely so they can absorb substantial losses when they arise.

Geithner also offered a brief update on the progress of the Public-Private Investment Partnership, and specifically the Legacy Securities Programme, revealing that the Treasury is “on the verge of making the initial allocation of capital to the fund managers who will have the authority to come in and buy those assets".