Frank calls for financial risk regulator By James Politi in Washington
Published: March 20 2008 13:55
Barney Frank, the powerful US lawmaker who chairs the House financial services committee, on Thursday called for Congress to consider authorising the Federal Reserve to broaden its powers and act as a ¨financial services risk regulator".
Mr Frank´s proposal, outlined in a speech in Boston, comes amid increasing pressure in Congress for tighter regulation of investment banks following the Fed´s decision on Sunday night to offer them emergency finance.
"To the extent that anybody is creating credit, they ought to be subject to the same type of prudential supervision that now applies only to banks," Mr Frank proposed.
Lawmakers have this week said they would examine whether investment banks should continue to be regulated by the Securities and Exchange Commission under a light-touch regime, or whether they needed to be subject to tighter regulation.
Mr Frank on Thursday said that if entities such as investment banks wanted access to emergency cash, they would have to accept the supervision of a regulator that "could have enhanced tools to receive timely market information from market players, inspect institutions, report to Congress on the health of the entire financial sector and act when necessary to limit risky practices or protect the integrity of the financial system."
The Massachusetts Democrat said that the Fed should either be empowered to act as the regulator or a separate one should be established.
This week, a Democratic aide in the Senate said the banking committee, chaired by Chris Dodd, would also study the regulatory framework for investment banks. Richard Shelby, the top Republican on the committee, has for months been urging lawmakers to take a closer look at these issues and a spokesman said he "continues to be believe we should be asking questions" about investment banking regulation.
Chuck Schumer, the influential New York Democrat, on Monday told CNBC there "ought to be a greater degree of regulation" for investment banks.
The White House on Thursday said it was not familiar with Mr Frank´s proposal. "I know that he´s got several different ideas out there. We'll took a look at them all as we consider if here´s additional things that we need to do. But in terms of a new regulator, I'm not familiar with that," a spokeswoman.
In calling for a shake-up, the lawmakers may be pushing at an open door. Federal Reserve policymakers acknowledge it is not ideal for them to provide emergency funds to institutions they do not regulate and that are lightly regulated in general.
The New York Fed has long been frustrated by the regulatory legacy of Glass-Steagall, the 1930s law that separated commercial and investment banks. Its repeal in 1999 allowed for the creation of financial "supermarkets" such as Citigroup, but separate regulatory structures for commercial and investment banks survived.
Hank Paulson, US Treasury secretary, is aware of the shortcomings of the current fragmented regulatory system.
The Treasury had been expected to release a new regulatory blueprint before the end of the month, but that timing could slip. A Treasury spokeswoman on Wednesday said: "The Treasury department has been working on our blueprint for regulatory reform over the last year. We are considering all issues as we propose broad changes to out regulatory structure in the near and short term".
However, while the Fed and Treasury might favour supervisory consolidation, they might not want to go too far in imposing additional regulations on the investment banks. Paul Volcker, former Fed chairman, joined the chorus of those arguing for tighter regulation in return for access to emergency finance. "We're going to lend to them and protect them, shouldn't they be regulated? ... absolutely," he said in an interview with CBS's Charlie Rose show on Tuesday night.
The SEC has only limited powers to prevent Wall Street groups from taking on the risky positions in mortgages and other securities that have been at the heart of the credit crisis. While the SEC's mandate is to protect investors, it does not have the authority to tackle systemic risk in the same way the Fed does.
Many investment bankers fear tighter regulation, concerned it could make them more bureaucratic and slower to make decisions, and that they could face constraints on the deployment of their capital.
However, many appear happy to have the Fed take over as their lead supervisor. The situation where investment banks have access to emergency finance with nothing asked in return does not seem sustainable.
"For years, the investment banks have always assumed that in a systemic meltdown they would have access to the discount window. That has been demonstrated," said Steve Crawford, a former chief financial officer of Morgan Stanley who is now at Centerview, a boutique advisory firm.
Copyright The Financial Times Limited 2008