Today, the Senate Committee on Banking, Housing and Urban Affairs held a hearing on ways to strengthen and streamline prudential bank supervision. The purpose of the hearing was to discuss how banks should be regulated in the future in order to ensure (i) their safe and sound operation; and (ii) the protection of customers. In Chairman Dodd’s opening remarks to the panelists, he questioned whether the Administration’s proposals to form a single national bank supervisor, place the FDIC or Federal Reserve in charge of supervision of state banks and give the Federal Reserve additional authority over holding companies go far enough to achieve these objectives.

Members of the first panel included:

  • Sheila Bair, Chairman of the FDIC. Chairman Bair noted that the “prospect of a unified supervisory authority is alluring in its simplicity” but that there is no evidence to support a conclusion that such a system would have prevented the “widespread economic damage that has occurred over the past two years.” Chairman Bair supported proposals to create a Financial Services Oversight Counsel and the Consumer Financial Protection Agency (CFPA) “to address regulatory gaps in prudential supervision and consumer protection” and prevent future arbitrage between the bank and non-bank financial systems.
  • John Dugan, Comptroller of the Currency. Comptroller Dugan also supported creation of a “council of financial regulators to identify and monitor systemic risk” with “enhanced authority to resolve systemically significant financial institutions.” Additionally, while supporting the creation of the CFPA to consolidate consumer protection rulemaking in a single agency, he disagreed with certain aspects of the CFPA as proposed. He suggested that all rules should be uniform, and the proposals that remove federal preemption for national banks and allow states to provide additional regulations for national bank activities would create an unworkable scenario.
  • Daniel Tarullo, of the Board of Governors of the Federal Reserve System. Governor Tarullo set forth four elements for an effective prudential regulation and supervision frame work. First, there must be sound regulation and supervisory oversight developed in a manner that promotes market discipline to confine unnecessary risk-taking by financial institutions. Second, supervision should be effective but should also vary based on the complexity of the institution being supervised. Third, there should not be gaps in the regulatory or supervisory system. Fourth, prudential supervision of systemically significant institutions must “complement and support regulatory measures designed to contain systemic risk and the too-big-to-fail problem….”
  • John Bowman, Acting Director of the OTS. Director Bowman outlined four principals that are essential to creating appropriate reform for the financial system. First, he suggested that proposed changes should address real problems and should not create loopholes in the regulatory framework. Second, all regulations should be uniform for each financial institutions. Third, a system should be put in place to provide for the orderly resolution of systemically significant institutions. Fourth, a single entity to regulate consumer financial products should be created with authority to regulate all consumer financial products regardless of the charter of the issuing entity. Director Bowman did not agree with the Administration’s proposals to eliminate the thrift charter and consolidate the OTS and the OCC into a single national banking regulator.

The second panel, consisting of Eugene Ludwig, CEO of Promontory Financial Group, Richard Carnell, Professor at Fordham University School of Law, and Martin Baily, Senior Fellow of Economic Studies at the Brookings Institution, was rescheduled for a later date.