Today, the full House Financial Services Committee held a hearing entitled “Perspectives on Regulation of Systemic Risk in the Financial Services Industry” as part of what Committee Chairman, Barney Frank, has stated is the essential task of addressing “the need for financial regulatory restructuring to diminish systemic risk and to enhance market integrity.” The following witnesses testified before the Committee:

  • Steve Bartlett, President & Chief Executive Officer, Financial Services Roundtable
  • T. Timothy Ryan, Jr., President & Chief Executive Officer, Securities Industry and Financial Markets Association (SIFMA) (and former Director, Office of Thirft Supervision)
  • Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute (and former SEC Commissioner)
  • Terry J. Jorde, President & Chief Executive Officer, CountryBank USA on behalf of Independent Community Bankers of America (ICBA)
  • Travis Plunkett, Legislative Director, Consumer Federation of America (CFA)
  • Damon Silver, Associate General Counsel, AFL-CIO, and Deputy Chair, Congressional Oversight Panel
  • Edward L. Yingling, President & Chief Executive Officer, American Bankers Association (ABA)

The witnesses generally testified on four issues:

  • how to define “systemic risk”;
  • who should be the systemic risk regulator;
  • the function of the systemic risk regulator; and
  • whether institutions should be designated as systemic risks.

On behalf of the Financial Services Roundtable, Mr. Bartlett advocated a systemic risk regulatory regime or, rather, a market stability regulator. The position of the Roundtable is that the responsibility of the market stability regulator should be to identify, prevent and mitigate systemic risk by “looking across the entire financial services sector to identify interconnections that could pose a risk to the financial system.” Rather than providing the market risk regulator with “super-regulatory” powers, Mr. Bartlett urged that once a systemic risk is identified, all actions would generally be taken through the institution’s primary regulator. The Roundtable would recommend the Federal Reserve as the market stability regulator. Mr. Bartlett also emphasized that the U.S. regulatory system should be coordinated with international standards.

For SIFMA, Mr. Ryan supported a financial markets stability regulator as a first step to regulatory reform and that this regulator should be responsible for “monitoring systemic risks across firms and markets” with some direct supervisory authority over systemically significant institutions. In addition, SIFMA’s position is that the financial markets stability regulator should have the authority to adopt uniform system risk regulations and to act as a lender of last resort. Mr. Ryan stated that “[i]nternational coordination on systemic issues will be critical”

The focus of Mr. Wallison’s testimony was the harm that would be caused by designating companies as “systemically significant.” He testified that such a designation “has the potential to destroy competition in every market where a systemically significant company is designated and to fundamentally change the nature of our financial system.” He cited Fannie Mae and Freddie Mac as examples. Mr. Wallison stated that “[w]e will achieve nothing by setting up a systemic regulator.” He further testified that the Federal Reserve would be the “worst possible choice” for a systemic regulator due to its conflicting monetary policy role.

Contrary to Mr. Wallison’s position, Ms. Jorde testified that it is the ICBA's position that institutions that pose a systemic risk should be identified and subjected to additional supervision and regulation by a federal agency—most likely the Federal Reserve. In addition, Mr. Jorde testified that these institutions should be subject to a higher capital charge and fees for both the cost of additional supervision and to fund a systemic risk fund similar to the FDIC's Deposit Insurance Fund. Ms. Jorde stated that insured banks that are affiliated with systemic risk institutions should be assessed a systemic risk premium by the FDIC. Ultimately, Ms. Jorde testified, Congress should consider the breakup of systemic risk institutions and provide the systemic risk regulator with the authority to prohibit the merger of institutions that would result in a systemic risk institution.

Mr. Plunkett testified that it is the CFA’s position that there really is “no need to improve systemic risk regulation.” The focus, he said, should be on financial regulatory reform because past failings were the result of existing regulators’ unwillingness to “use the authority they had to rein in risky practices” and not a lack of systemic risk regulation. He did, however, concede that there may be a benefit to having a central systemic risk regulator to “coordinate regulatory efforts related to systemic risk and to ensure that this remains a priority once the current crisis is past.” Mr. Plunkett testified that if the Federal Reserve is to be the systemic risk regulator, the conflict with its monetary policy role must be mitigated and systemic risk regulation must be carried out with “the full transparency and public accountability that it demands.”

Mr. Silvers, who also is the Deputy Chair of the Congressional Oversight Panel, testified that it is the AFL-CIO’s position that systemic risk regulation is necessary across all markets and financial activities and must be done in cooperation with primary regulators. To be effective, Mr. Silvers testified, the systemic risk regulator must have “the power to bail out institutions” but most not have the authority to “override investor and consumer protection rules.” Mr. Silvers raised concerns over the appointment of the Federal Reserve as the systemic risk regulator, which concerns include the “inherent conflict between consumer protection and safety and soundness.”

In his testimony, Mr. Yingling emphasized the need for a systemic regulator, an established method for resolving systemically important nonbank financial institutions and to address gaps in our regulatory system. First and foremost, he testified that the ABA “strongly supports the creation of a systemic regulator.” It is the ABA’s position, he said, that the primary responsibility of the systemic regulator should be to protect the economy from major shocks. He also said the systemic regulator should work within the existing regulatory structure as much as possible. While the ABA generally supports the appointment of the Federal Reserve as the systemic regulator, it has concerns, Mr. Yingling testified, that this might conflict with the Federal Reserve’s monetary policy role.