Regulatory Reform Marches On

By Lisa Valentine

Three proposals announced as part of the Obama administration’s sweeping financial reform are making their way to Capitol Hill: systemic risk legislation, national bank supervisor and resolution authority legislation, and credit rating agency reform legislation.

The contents of the legislation have been expected, as they were part of the President’s Financial Stability plan. This post will focus on the systemic risk legislation; following posts will focus on the other pending regulatory actions.

The systemic risk legislation seeks to create an all-knowing entity called the Financial Services Oversight Council. The council is charged with coordination of policies, risk identification and dispute resolution. The council will fall under the auspices of the U.S. Treasury and will be comprised of eight members including a who’s who of financial industry regulators: Treasury Secretary Tim Geithner, Fed Chairman Ben Bernanke, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler, SEC Chairman Mary Schapiro, FDIC Chairperson Sheila Bair, Director of the Federal Housing Finance Agency (FHFA) James Lockhart and the as-yet-unnamed Director of the National Bank Supervisor (NBS) – a position that has been recommended by the administration to take over the responsibilities of the Office of the Comptroller and Office of Thrift Supervision.

Is anyone missing? Not from the bureaucratic side, that’s for sure. But just naming these career government regulators to a council – when the agencies are supposed to be working together anyway – seems more like a PR stunt than an actual strategy to identify and mitigate systemic risk.

The Federal Reserve will be the supervisor of any firm that is too big to fail, whether that firm is a bank or not. This expansion of the role of the Fed has left many questioning whether a Super Fed is the right move. Any firm that is large and interconnected will have to comply with higher standards on capital, liquidity and risk management. The administration is looking for FDIC-like action if any of these tier 1 firms gets into trouble. (The FDIC is charged with taking “prompt corrective action” against banks that get out of line.).

In the only move that acknowledges that perhaps the Fed may have the ability to abuse it’s new-found powers, the legislation does prevent the Fed from lending emergency money without first getting the ok from the Treasury. This caveat is in direct response to the Fed’s lending huge amounts of cash to AIG to stop it from imploding. The public backlash from that lending is still hurting Bernanke’s public reputation (although Obama has selected Bernanke for a second term as Fed Chairman).