Today, the House Committee on Financial Services held a hearing entitled “Federal Regulator Perspectives on Financial Regulatory Reform Proposals.” Testifying before the committee were the following individuals.

  • Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation (FDIC)
  • John C. Dugan, Comptroller, Office of the Comptroller of the Currency (OCC)
  • John E. Bowman, Acting Director, Office of Thrift Supervision (OTS)
  • Joseph A. Smith, Jr., North Carolina Commissioner of Banks on behalf of the Conference of State Bank Supervisors (CSBS)

The witnesses discussed their views on the Obama Administration’s proposals for financial regulatory reform.

Ms. Bair discussed ways to address and improve the supervision of systemically important institutions and the identification of issues that pose risks to the financial system. She stated that while regulatory supervision is important, regulation is not enough by itself to control risk-taking. “[W]e must recognize that much of the risk in recent years was built up, within and around, financial firms that were already subject to extensive regulation and prudential supervision.” In addition to addressing regulatory gaps, she advocated focusing on “the elements necessary to create a credible resolution regime that can effectively address the resolution of financial institutions regardless of their size or complexity.” She also discussed the FDIC’s support for the establishment of a new consumer financial protection agency (CFPA) and recommended “changes to assure appropriate recognition of the relationship between the safety and soundness of insured banks and their consumer practices in both the structure of the new agency, as well as its role in examination and enforcement.”

Mr. Dugan testified that the OCC supports many elements of the Obama administration’s proposals for financial regulatory reform, stating that it would be appropriate to extend consolidated supervision to all systematically significant financial firms by extending the Federal Reserve’s holding company regulation to large securities and insurance firms. “However, one aspect of the proposal goes much too far, which is to grant broad new authority to the Federal Reserve to override the primary banking supervisor on standards, examination, and enforcement applicable to the bank,” which, in his view, would undermine the authority and accountability of the bank supervisor. With respect to the CFPA, Mr. Dugan stated, “It makes sense to consolidate all consumer protection rulewriting in a single agency, with the rules applying to all financial providers of a product, both bank and nonbank. But we believe the rules must be uniform, and that banking supervisors must have meaningful input into formulating them. Unfortunately, the proposed CFPA falls short on both counts.”

Mr. Bowman remarked that the OTS supports the fundamentals of the Obama administration’s proposals for financial regulatory reform, but has concerns about certain elements. Among other areas of disagreement, he said that the OTS does not support elimination of the federal thrift charter, which would require all federal thrift institutions to convert to either a national bank or a state bank charter. He argued that federal banks and thrift institutions are fundamentally different enough to warrant two distinct federal banking charters. Mr. Bowman also asserted that there is no evidence that consolidation of regulatory bodies would have helped prevent the financial crises. Moreover, he pointed out that while the OTS regulated the largest bank that failed, it did not regulate the largest banks that “were allowed to fail.” Thrifts must, by law, keep a majority of their assets in home mortgages and other consumer retail lending activities which Mr. Bowman said explains why OTS-regulated institutions were particularly affected by the mortgage lending crises. He dismissed theories that institutions were shopping among regulators to find the one most to their liking, citing figures, among others, on charter conversions that indicated “there has been no stampede to OTS supervision.” He pointed out that the diversity of federal financial institution regulators produces “a diversity of viewpoints, opinions and approaches that inform and enrich supervision and improve decision-making.” Finally, he noted the expense that would be imposed on thrifts if they are required to convert to banks.

Mr. Smith made five main points. First, he said that a federal consumer financial protection agency should be focused on rulemaking and must reflect the important role of the states in consumer protection. Second, he said that creating a monolithic federal regulator would significantly weaken the financial system. Third, he said that new federal fees on state-chartered banks over $10 billion would damage the dual-banking system by causing further consolidation into the national banking system, and will not add any additional supervisory oversight to the banking system. Fourth, he argued that the financial services oversight council should include representatives of state financial regulators because states are often the first to identify emerging trends, practices and products or threats that impact the financial system, due to their proximity and knowledge of the entities they regulate. Finally, he said that an effective resolutions regime for systemically significant institutions should be focused on managing failures in an orderly fashion and must allow firms to fail