Financial Regulatory Forum

“Fed fatigue” weighs on Obama regulatory push

By Reuters Staff
July 24, 2009

USA-FED/BERNANKE-TESTIMONY By Kevin Drawbaugh

WASHINGTON, July 23 (Reuters) – The Obama administration wants to hang a new shingle over the U.S. Federal Reserve’s marble-columned door that says “systemic risk regulator.” But many lawmakers, from both parties, aren’t feeling very confident about the Fed. It’s an issue surrounding a central part of President Barack Obama’s plan to overhaul financial regulation and it prompted skeptical comments at a Senate hearing on Thursday.

“I share my colleagues’ concerns about giving the Fed additional authority to regulate systemic risk. The Fed hasn’t done a perfect job, to put it mildly, with the responsibilities it already has,” said Senate Banking Committee Chairman Christopher Dodd.

He said he agreed it was important for the government to get a handle on systemic risk to prevent future financial crises like the one last year that shook world economies.

But Dodd said he was leaning toward the idea of centering systemic risk oversight in an inter-agency council — an idea favored by a number of other lawmakers, but viewed by some in the administration as leading to a toothless committee.

Senator Richard Shelby, the banking committee’s top Republican, accused the Fed of backing flawed global capital standards, failing to police large banks, and acting too late on mortgage underwriting guidelines to protect consumers.

“The Federal Reserve is already overburdened with its responsibility for monetary policy, the payment system, consumer protection and bank supervision. I believe anointing the Fed as the systemic risk regulator will make what has proven to be a bad bank regulator even worse,” Shelby said.

The Fed’s spotty record has undermined the administration’s vision of the central bank as a super-regulator for months, but the White House has not deviated from its proposal.

On Wednesday, the White House sent draft legislative
language to Congress on systemic risk regulation that placed the Fed in a central role, while also calling for establishment of a council of regulators that would work with the Fed.

A senior Fed official defended the Obama proposal at the hearing. Systemic risk oversight would be a natural extension of the Fed’s existing jobs, Fed Governor Daniel Tarullo said.

“There are some important synergies between systemic risk regulation and monetary policy,” he told the committee.

AVOIDING ANOTHER CRISIS

The idea behind systemic risk regulation is to prevent a recurrence of what happened last year when the financial system nearly collapsed for reasons — a burst mortgage bubble, toxic debts, predatory lending, unregulated derivatives — that no single government agency could fully foresee or prevent.

The confused jumble of Bush administration bailouts that followed, at a stunning cost to taxpayers, landed in Obama’s lap when he took office. Six months of intense debate over a regulatory response is now largely shifting to Capitol Hill.

By the end of July, the administration will have transmitted more than a half-dozen pieces of financial regulation reform legislation to Congress.

It sent draft bills to Capitol Hill on Thursday calling for consolidating two bank supervisory offices and empowering two other agencies with “resolution authority” to seize and shut down large, troubled non-bank firms whose failure could threaten the financial system.

Republicans in the U.S. House of Representatives introduced their own package of financial oversight reforms on Thursday, some resembling the administration’s proposals and some wholly different. Months of intense policy debate lie ahead.

Obama wants to sign reforms into law before the end of the year. But delays are arising in Congress, a potentially lethal danger for the president’s agenda, which analysts said could lose momentum as the economy bounces back and banks stabilize.

The Senate committee hearing took place as the government reported U.S. existing home sales notched their third monthly rise in June, while stocks rallied, with the Dow Jones industrial average closing up 2.1 percent at 9,069.29, the highest close since last November.

Federal Deposit Insurance Corp. Chairman Sheila Bair told the committee the systemic risk council, which would work with the Fed, should be headed by a presidential appointee, not the secretary of the Treasury, as the administration proposes.

Federal Reserve Chairman Ben Bernanke will testify on financial regulation reform on Friday before the U.S. House of Representatives Financial Services Committee, along with Treasury Secretary Timothy Geithner and Bair.

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