2nd UPDATE: Regulators: Systemic Risk Regulator No Panacea
March 19 2009 - 1:35PM
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 told 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 doing so may give one agency too much power and
may also hinder the Fed's ability to set monetary policy.
In that regard, Senate Banking Chairman Christopher Dodd,
D-Conn., expressed skepticism about expanding the Federal Reserve's
powers to serve as a systemic risk regulator, saying the Fed has
failed to protect consumers.
"Whether or not those vast powers will reside at the Fed remains
an open question," Dodd said in opening remarks.
Noting the news this morning about the Fed's "ever-ballooning
portfolio and its expanding balance sheet which could reach $3
trillion," Dodd suggested Congress must carefully consider if the
Fed is the appropriate regulator for the task.
Dodd said while he agrees with Fed Chairman Ben Bernanke that a
process should be developed to help resolve failing non-banking
firms, it might make more sense to empower the Federal Deposit
Insurance Corporation with that authority. Similarly, the panel's
top Republican Sen. Richard Shelby of Alabama said "a lot of people
have high regard for the FDIC, and so do I." He added he thinks the
FDIC has "a great track record" on winding down financial
firms.
Meanwhile, Federal Reserve Board Governor Daniel K. Tarullo,
testifying Thursday, said 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 creating a systemic risk regulator will
not solve all of the financial market's woes.
"We all need to be realistic about what we can achieve
collectively in addressing this systemic risk issue," he said
during the hearing. "I don't think anybody should be under the
illusion that simply by saying systemic risk is important, that
we're going to solve" all of the really difficult problems in the
markets.
He added that 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.
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