Posted on 05 Nov 2009
A key Senate lawmaker is readying legislation that would dramatically redraw how the financial system is regulated, setting the chamber on a collision course with both the House of Representatives and the Obama administration, which have championed markedly different approaches.
The bill, which is being readied by Senate Banking Committee Chairman Christopher Dodd (D-CT), would strip almost all bank-supervision powers from the Federal Reserve and Federal Deposit Insurance Corp., according to people familiar with the matter. In their place, the bill would create a new agency in charge of supervising all banks and bank-holding companies, even the country's largest and most complex institutions.
Senate aides say the legislative plan could still be adjusted in coming days. In its current form, it has the potential to disrupt progress of the financial-regulation overhaul, one of the legislative priorities of the administration. Administration officials have billed the revamp as central to their effort to prevent a recurrence of last year's financial meltdown.
Mr. Dodd's proposal stakes out an extreme position, and is likely to face major resistance, especially from the banking industry. His effort comes as he prepares for a tough re-election battle in 2010. Mr. Dodd has been criticized for being too cozy with the banking industry in the past. This year he has advanced various proposals attacking banking practices, such as a new law limiting certain credit-card fees.
Even if his regulatory-overhaul plan runs aground, it could help Mr. Dodd position himself as a populist lawmaker willing to wage war on powerful financial institutions.
Legislation being ushered through the House by Rep. Barney Frank (D., Mass.) differs in many ways from Mr. Dodd's proposal. Mr. Frank's series of bills, which could come to a full vote in the House in December, would eliminate the bank-supervisory powers of just one federal agency, not three. The Fed's role in bank regulation would be expanded, not diminished, with the Fed getting new responsibility for the nation's largest financial institutions. And in Mr. Frank's version, the council of regulators appears much less powerful than in Mr. Dodd's.
A final agreement is still months away. The House and Senate must pass their own bills, and differences between them will have to be reconciled.
Mr. Dodd's plan to create a single national bank regulator is likely to draw fire. There are currently four different institutions with that responsibility. The banking industry has resisted such consolidation, worried that a single regulator would tend to favor large, national institutions at the expense of smaller ones.
FDIC Chairman Sheila Bair has pushed back against efforts to strip her agency of the power to supervise banks, describing a system of multiple regulators as the best guard against mistakes by any one of them. In October, appearing before Mr. Dodd's panel, Ms. Bair opposed consolidating supervision in one agency.
Under Mr. Dodd's plan, the FDIC would remain an insurer of deposits and the main agency overseeing bank failures. It also would be given the new job of dissolving large financial institutions on the brink of collapse.
Fed officials have also strongly resisted proposals to strip their authority, such as their current oversight of 800 banks and 5,000 bank-parent companies. Mr. Dodd's proposal is expected to retain the Fed's ability to serve as a "lender of last resort" to the financial system. The Fed would be allowed to attend bank examinations conducted by the new megaregulator, to keep a "finger on the pulse" of the banking system, one congressional aide said.
Under the proposal, the Fed likely would emerge as a completely different agency, having lost most bank-supervisory powers and the ability to write and enforce consumer-protection rules. Mr. Dodd's bill will likely throw into question the future of the 12 Federal Reserve Banks, which is where most of the Fed's bank examiners are based. Instead, the Fed would focus mostly on monetary policy.
Last month, Fed Chairman Ben Bernanke said the central bank's ability to conduct an "effective monetary policy" depended heavily on its role as a bank supervisor.
The Obama administration considered merging bank regulators as it was formulating its own proposals earlier this year, but officials say they nixed the idea as unlikely to get through Congress. An administration official said the White House has been briefed on Mr. Dodd's proposal.
"I think we are going to start out with the presumption of as much consolidated regulation as we can," said Sen. Jack Reed (D., R.I.) a senior member of the Senate Banking Committee.
Proponents of consolidating agencies argue such a move would stop banks from shopping around for the regulator with the lightest touch.
Mr. Dodd's plan is likely to face opposition within the Senate. Republicans are mostly lined up to oppose the creation of a new regulatory agency that would focus on consumer-oriented financial products.