Fed to Get Bigger Mandate to Supervise Financial System

The Obama administration says it is committed to overhauling the country's financial rule book by giving the Federal Reserve increased powers to guard against the types of risks that could bring down the entire system.

All large institutions whose failure could threaten the stability of the financial system will be subjected to regulation by the Fed, administration officials said.

CNBC.com

The proposal also would create a council of regulators with broad coordination responsibility across the financial system.

The officials also said the administration will offer a stronger framework for investor protection, including increased oversight of consumer products ranging from credit cards to annuities.

Speaking in New York on Monday, Treasury Secretary Timothy Geithner said the regulatory overhaul will eliminate "gaps" in the financial system that encouraged risky behavior leading up to the meltdown.

"We had a financial system that was fundamentally too unstable and fragile, and it did a bad job of basic protection of consumers and investors," Geithner said during an economic conference hosted by Time Warner.

"Those are things we have to change." The administration's regulatory proposals were included as part of an opinion piece by Geithner and Lawrence Summers, director of the president's National Economic Council, published Monday in The Washington Post.

The administration appears to have backed away from a more extensive overhaul that would have consolidated all banking regulation into one agency.

Supporters of this approach, including Sen. Chuck Schumer, D-N.Y., have argued that the current system is inefficient.

• Slideshow: Worst Expected State Budget Gaps

"It does not make sense for up to four different regulatory bodies to retain oversight over the safety and soundness of banks and bank holding companies," Schumer said in a letter to Geithner on Friday.

"Retaining multiple regulatory entities preserves the regulatory arbitrage that allows institutions to pick the oversight scheme that benefits them the most, often at the expense of consumers and the health of the system overall." The White House said Monday that Obama would unveil his regulatory overhaul plan on Wednesday.

"Like all financial crises, the current crisis is a crisis of confidence and trust," Geithner and Summers wrote in The Washington Post.

"Reassuring the American people that our financial system will be better controlled is critical to our economic recovery." The two officials said the administration's overhaul will propose increasing capital and liquidity requirements for all financial institutions and will impose more stringent requirements on the largest and most interconnected firms.

Geithner said the administration would seek to ensure that tougher rules don't bog down the banking system with red tape.

"You want to have a system where innovation is rich and healthy, so we have to find a balance. We did not get the balance right," he said.

At his appearance in New York, Geithner declined to give specifics on the regulatory reform plan or say whether it will include eliminating certain agencies.

After Obama unveils the financial overhaul proposals on Wednesday, Geithner is scheduled to testify Thursday before both the Senate Banking Committee and the House Financial Services Committee.

The administration was still expected to call for the functions of the Office of Thrift Supervision to be merged into the Office of the Comptroller of the Currency.

But it would leave the Fed, the OCC and the Federal Deposit Insurance Corp. as major banking regulators.

The administration's plan will impose "robust reporting requirements" on issuers of asset-backed securities and require institutions that sell them to retain a financial interest in their performance, Summers and Geithner wrote.

The sale of securities backed by subprime mortgages was among the major causes of the financial crisis that struck with force last fall.

"The basic objective is to have a system where people are less likely to be taken advantage of," Geithner said Monday, singling out the bad lending practices that helped trigger the meltdown.

The administration plan will give federal regulators greater powers to deal with any large financial holding company whose failure could disrupt the entire system.

The opinion piece said those increased powers mean the government no longer will be forced to choose between bailouts and a financial collapse that could rock the entire system.

Officials said they had no good choices when faced the potential failure last fall of insurance giant American International Group.

Summers and Geithner said the administration also will work to raise international standards for financial regulation.

"We don't want a situation where we have so many entities crawling over institutions and sending mixed signals," Geithner said.

"We should be able to design a system where there are limits on excessive risk and more clarity on the rules of the game."

© 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.