On Thursday, the Senate Committee on Banking, Housing and Urban Affairs held a hearing to discuss modernizing current bank regulations. Much of the discussion focused on the proposal of creating a systemic risk regulator. Witnesses included:

  • John C. Dugan , Comptroller of the Currency
  • Daniel K. Tarullo, Board of Governors of the Federal Reserve System
  • Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation
  • Michael E. Fryzel , Chairman, National Credit Union Administration
  • Scott M. Polakoff, Acting Director, Office of Thrift Supervision
  • Joseph A. Smith, Jr, North Carolina Commissioner of Banks, on behalf of the Conference of State Bank Supervisors
  • George Reynolds, Chairman, National Association of State Credit Union Supervisors and Senior Deputy Commissioner, Georgia Department of Banking and Finance

In his opening remarks, Chairman Christopher Dodd (D-CT) stated that the creation of an “integrated, transparent and comprehensive architecture” for bank regulation may require the creation of a systemic risk regulator. Chairman Dodd noted that the FDIC could perform such a role, as could the Federal Reserve.

Comptroller Dugan suggested that the Federal Reserve could serve as the systemic risk regulator, but he cautioned that the Federal Reserve’s power in such a role “may need to vary depending on the nature of the systemically significant entity.” He was also critical of the number of bank regulators, noting that “we have four federal regulators, 12 Federal Reserve Banks, and state regulators, nearly all of which have some type of overlapping supervisory responsibilities.”

Governor Tarullo also urged that regulation be consolidated. He noted that a systemic risk regulator could assist in this consolidation, but such a regulator would need to employ a “sophisticated, comprehensive and multi-disciplinary approach.” He also expressed some concern about how much authority such a regulator should posses. Mr. Tarullo also focused on capital requirements, suggesting that existing capital requirements should be strengthened.

Acting Director Polakoff argued that the “establishment of systemic risk regulator is an essential outcome of any initiative to modernize bank supervision and regulation.” He suggested such a regulator should have the authority “to monitor and exercise supervision over any company whose actions or failure could pose a risk to financial stability” including companies involved in “banking, securities and insurance.”

Chairman Bair was more skeptical of a proposed systemic risk regulator and stated that “we need to recognize that simply creating a new systemic risk regulator is not a panacea.” She noted that “U.S. regulators already had many broad powers to supervise financial institutions” and that Congress should proceed carefully” before rushing to create a new systemic risk regulator. Congress should focus on limiting the “size and complexity” of systemically significant institutions. Additionally, Congress should develop “a legal mechanism for the orderly resolution” of systemically significant entities.