Lift seen for Obama financial reform on Fed shift

October 2, 2009

Federal Reserve Chairman Ben Bernanke testifies before the House Financial Services Committee on financial regulatory reform on Capitol Hill in Washington October 1, 2009. REUTERS/Richard Clement (UNITED STATES BUSINESS POLITICS) By Kevin Drawbaugh
WASHINGTON, Oct 1 (Reuters) – The Obama administration’s plan to form a “systemic risk” regulator for the economy looked more likely to win congressional approval after lawmakers noted a change in tone by the Federal Reserve on Thursday.

“We’re on a course now to perhaps put together something that can be accomplished,” said Democratic Representative Paul Kanjorski at a U.S. House of Representatives committee hearing where Fed Chairman Ben Bernanke testified on the issue.

In remarks to the committee, Bernanke emphasized that a new council of financial regulators, not just the Fed, should play the lead role in monitoring “systemic risk” in the economy.

The Fed chairman said this position was not new, but lawmakers detected an increased recognition by the Fed of a larger role for the council, an approach backed by critics of the Fed’s oversight before the financial crisis.

“There were some, myself included, who earlier this year thought that the Federal Reserve would have a larger role in this. Now it looks like it will be part of a conciliar structure,” said House Financial Services Committee Chairman Barney Frank, a Democrat, at the hearing with Bernanke.

The comments from Kanjorski, who is Chairman of the House Capital Markets Subcommittee, and from Frank and the Fed chairman came amid skepticism in Congress about administration plans to make the Fed the lead “systemic risk regulator”, albeit in coordination with an inter-agency council.

The Fed is “well suited” to supervise financial institutions of systemic importance, but the council should monitor the very broadest sorts of risk, Bernanke said.

The administration has backed the idea of a council, which many senators favor, but administration officials for months have urged that the Fed be the central systemic risk cop.

On July 24, Bernanke told Frank’s committee that supervising the financial system’s health would be a natural fit for the Fed, while noting the council idea had merit.

On Thursday, he said, “We have never supported, and the administration has never supported, a situation in which the Fed would be some kind of untrammeled super-regulator.

“The original administration proposal proposes a council and we support the council.”

In the aftermath of the worst financial crisis in generations, President Barack Obama and other world leaders are trying to tighten regulation of banks and capital markets.

The effort got a boost from the Group of 20 summit meeting in Pittsburgh last week, where leaders urged major changes. But in the United States, banks are fighting reforms and Obama’s program faces an uphill climb, especially in the Senate.

Bernanke highlighted another administration proposal — creating a new “resolution authority” for the government to deal with failing large financial firms that are not banks.

Obama wants to avoid further on-the-fly bailouts like those undertaken in 2008 by the Bush administration of firms such as AIG and Citigroup, while avoiding shocks to the system like last year’s collapse of investment bank Lehman Brothers.

The push for a new approach, somewhere between bailout and bankruptcy, has raised concerns about a “too big to fail” culture that might encourage further excessive risk-taking.

“That has to be eliminated and fixed,” Bernanke said, adding he would not be happy with a resolution mechanism that did not impose losses on on shareholders and creditors.

Some critics point to the failures of the Fed, along with other regulators, to spot threats to the financial system posed by banks’ over-exposure to the housing bubble that helped cause the credit crisis and push the world economy into recession.

World Bank President Robert Zoellick on Monday sounded a cautionary note about granting greater regulatory power to the Fed, saying there had been lapses by central banks in monitoring risks in the run-up to the crisis.

Bernanke said it was a good idea for one single regulator to be responsible for supervising individual firms.

“However, the broader task of monitoring and addressing systemic risks that might arise from the interaction of different types of financial institutions and markets — both regulated and unregulated — may exceed the capacity of any individual supervisor,” he said.

“Instead, we should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole.”

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