UPDATE:US Regulators: New Systemic Risk Regulator Is No Panacea
March 19 2009 - 11:23AM
Dow Jones News
U.S. federal regulators Thursday told lawmakers that simply
creating a new systemic risk regulator to monitor the broad U.S.
financial system is not a cure-all and highlighted the need for
Congress to boost existing regulatory gaps.
A new systemic risk regulator "is not a panacea," Federal
Deposit Insurance Corp. Chairman Sheila Bair is expected to tell
the Senate Banking Committee Thursday.
In her prepared testimony Bair warned Congress to move carefully
on ambitious efforts to create a new systemic risk regulator and
said it might be better for lawmakers looking to modernize
financial regulations to focus on boosting regulators' existing
authorities.
"Changes in our regulatory and supervisory approach are clearly
warranted, but Congress should proceed carefully and deliberately
in creating a new systemic risk regulator," she said. "In addition,
changes that build on existing supervisory structures and
authorities - that fill regulatory voids and improve cooperation -
can be implemented more quickly and effectively."
Bair's comments come as Congress is gearing up to restructure
the country's financial regulatory framework. Some lawmakers are
seeking to dub the Federal Reserve the new systemic risk regulator,
but critics fear that doing so may give one agency too much power
and may also hinder the Fed's ability to set monetary policy.
Federal Reserve Board Governor Daniel K. Tarullo, who will also
testify Thursday, said in his prepared testimony that a new
systemic-risk regulator should complement and not trump existing
regulators' day-to-day oversight of large financial
institutions.
"It seems most sensible that the role of the systemic risk
authority be to complement, not displace, that of a firm's
consolidated supervisor," Tarullo said. "Under this model, the
firm's consolidated supervisor would continue to have primary
responsibility for the day-to-day supervision of the firm's
risk-management practices, including those relating to compliance
risk management, and for focusing on the safety and soundness of
the individual institution."
Like Bair he suggested that creating a systemic risk regulator
will not solve all of the financial market's woes. He said other
steps must be taken to ensure the safety and soundness of large
non-banking institutions. This should include broadening existing
framework of consolidated supervision over banking institutions to
large non-banking firms as well, he said.
"The board believes there should be statutory coverage of all
systemically important financial firms - not just those affiliated
with an insured bank as provided for under the Bank Holding Company
Act of 1956," Tarullo said.
"The current financial crisis has highlighted a fact that had
become more and more apparent in recent years - that risks to the
financial system can arise not only in the banking sector, but also
from the activities of financial firms that traditionally have not
been subject to the type of consolidated supervision applied to
bank holding companies."
Tarullo, echoing comments by Fed Chairman Ben Bernanke, said it
would make sense for the Fed to play some type of role in
overseeing systemic risk. He also repeated the Fed's call for a
mechanism to wind down financial companies other than banks if they
pose dramatic risks to the economy.
Among other areas where the Fed has cited the need for
additional risk oversight is in the over-the-counter derivatives
market. The Fed has played a leading role in working with the
private sector and other regulators to develop centralized clearing
for credit-default swaps, an exotic financial instrument that many
say contributed to the near-downfall of American International
Group Inc. (AIG).
The Fed will serve as the primary regulator for
IntercontinentalExchange Inc.'s (ICE) new clearinghouse, but
Tarullo said he believes Congress needs to extend the Fed's
authority over payment and settlement systems.
Proving how difficult it might be for lawmakers to agree on a
plan for revamping market regulations, John C. Dugan, the
Comptroller of the Currency, made some suggestions in his prepared
remarks for regulatory reform that could likely incite turf battles
among the various federal and state regulators.
He advocated giving banking regulators the primary task of
ensuring consumer protection, noting that prudential supervisors
are best-suited to protect consumers because of their examination
processes. Such a move could evoke tensions with the Securities and
Exchange Commission, whose main mission is to protect
investors.
-By Maya Jackson Randall and Sarah Lynch, Dow Jones Newswires;
202-862-9255; maya.jackson-randall@dowjones.com