Today, the House Committee on Financial Services held a hearing entitled “Regulatory Perspectives on the Obama Administration’s Financial Regulatory Reform Proposals-Part Two." Testifying before the committee were the following witnesses:
- Timothy F. Geithner, Secretary, U.S. Department of the Treasury
- Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System
- Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation
- John C. Dugan, Comptroller, Office of the Comptroller of the Currency
- John E. Bowman, Acting Director, Office of Thrift Supervision
- Joseph A. Smith, Jr., North Carolina Commissioner of Banks on behalf of the Conference of State Bank Supervisors (CSBS)
Mr. Geithner provided an overview of the financial regulatory reforms proposed by the Obama Administration on June 17, 2009. He outlined five key priorities for reform:
- consumer protection through the creation of the Consumer Financial Protection Agency (CFPA ),
- financial stability by requiring higher capital requirements,
- market oversight of new products,
- resolution procedures for fast responses in the event of financial crises and
- a level playing field internationally.
He argued that the proposed reform are necessary, stating, “[The reforms] would substantially alter the ability of financial institutions to escape regulation, to choose which regulator suits them best, to shape the content of future regulation and to continue the financial practices that were lucrative for parts of the industry for a time, but that ultimately proved so damaging. That is why we have to act, and why we need to deliver real, meaningful change.”
Mr. Bernanke defended the proposed designation of the Federal Reserve as a “systemic risk” regulator to curb threats posed to the broader financial system. “Close familiarity with private credit relationships, particularly among the largest financial institutions and through critical payment and settlement systems, makes monetary policy makers better able to anticipate how their actions will affect the economy.” On the other hand, Mr. Bernanke opposed shifting responsibility for writing and enforcing regulations to protect consumers from unfair practices in financial transactions from the Federal Reserve to the CFPA. He stated that “risk assessment and compliance monitoring of consumer and prudential regulations are closely related, and [when combined] entail both informational advantages and resource savings.” He pointed out that in the last three years the Federal Reserve has adopted strong consumer protection measures in the mortgage and credit card areas, which benefited from the supervisory and research capabilities of the Federal Reserve.
Ms. Bair focused on the need for efficient crises resolution. “We must find ways to impose greater market discipline on systemically important institutions. In a properly functioning market economy there will be winners and losers, and when firms — through their own mismanagement and excessive risk taking – are no longer viable, they should fail. Actions that prevent firms from failing ultimately distort market mechanisms, including the market’s incentive to monitor the actions of similarly situated firms. Unfortunately, the actions taken during the past year have reinforced the idea that some financial organizations are too big to fail. The solution must involve a practical, effective and highly credible mechanism for the orderly resolution of these institutions similar to that which exists for FDIC-insured banks. In short, we need an end to too big to fail.”
Mr. Dugan centered on his concerns regarding the proposed CFPA. While he supports enhanced consumer protection standards, he warned that the Obama Administration’s proposal expressly allows states to adopt different rules and would repeal federal preemption that has allowed national banks to operate under uniform federal standards. in his view, the rules “should continue to be implemented by the federal banking agencies for banks, under the existing, well established regulatory and enforcement regime, and by the CFPA and the states for nonbank financial providers, which today are subject to different standards and far less actual oversight than federally regulated banks.” In addition, he urged Congress to preserve a fundamental role for the an independent bank supervisor that is solely dedicated to the prudential oversight of depository institutions and whose relationship with a systemic supervisor should be complementary.
Mr. Bowman defended the OTS, arguing that a case has not been made for abolishing the agency. He addressed concerns that (1) OTS was the regulator of the largest insured depository institutions that failed during the current economic turmoil and (2) financial institutions “shop” for the most lenient regulator. While the largest bank failure in the U.S. was OTS-regulated Washington Mutual, he argued that was because anything larger was deemed “too big to fail.” With respect to arbitrage, he pointed out that Citibank had been OTS-regulated but had switched to the supervision of the OCC prior to its failure. “No one has suggested that Citibank changed its charters to seek more lenient regulation.”
Mr. Smith, speaking on behalf of CSBS, addressed three main points: (1) the proposal to create a new CFPA, (2) the proposal to create a new Financial Services Oversight Council and (3) the structure for consolidated supervision of large, interconnected financially firms. His testimony centered on the role the states would play under the proposed financial regulatory reforms. For example, he applauded the fact that the Obama Administration’s proposed financial regulatory reforms would preserve the dual banking system. With regards to the CFPA, he supported the fact that it would “preserve for the states the ability to set higher, stronger consumer protection standards.” He also stated, “Additionally, any federal consumer protection legislation must ensure that state authorities continue to have the power to enforce applicable state and federal laws for all financial entities operating within their borders, regardless of charter type.”