The Senate and the Obama administration are nearing agreement on forming a council of regulators, led by the Treasury secretary, to identify systemic risk to the nation’s financial system, officials said Wednesday.
The issue is one of the most fundamental in the contentious effort to overhaul regulation after the financial crisis, and addresses one of the primary lessons of the near debacle: that no one had been assigned to ensure the stability of the system as a whole and detect the kinds of excessive risk-taking and imbalances that could rock an entire economy.
Assigning the Treasury Department the job of spotting incipient trouble and addressing it quickly has support among senators from both parties, though several important provisions, including whether the council would have the ability to bypass existing banking regulators and impose its own rules on huge financial firms, remain to be worked out.
The effect would be to diminish the authority of the Federal Reserve, whose regulation of banks has been criticized for failing to head off the problems.
Though some in the Fed continue to push for the central bank to be the overseer of systemic risk, the chairman, Ben S. Bernanke, is willing to go along with a Treasury-led council.
Legislation passed by the House in December to reshape the regulatory system gave the Fed more input on systemic risk than the Senate concept would.
Officials said that Mr. Bernanke, who survived a contentious Senate reconfirmation process last month, was focused instead on preserving the Fed’s supervision of the largest bank holding companies, which include Bank of America , Citigroup and JPMorgan Chase , as well as investment houses like Goldman Sachs and Morgan Stanley, which converted to holding companies during the crisis.
“The idea of having a council, with the secretary of the Treasury as chair, and the Fed chairman or his designee as vice chair, is that you’re getting an early-warning system,” said the chairman of the Senate Banking Committee, Christopher J. Dodd, Democrat of Connecticut.
The idea of the council is similar to a concept the White House proposed last summer. But a senior administration official, speaking on the condition of anonymity so as not to interfere with the Senate negotiations, expressed concern about reducing the Fed’s powers any further.
“We think it’s really critical that the Fed, as a lender of last resort in the economy, have hands-on supervision of the largest firms in our economy,” the official said.
Mr. Dodd, who had proposed to strip away those powers as part of a regulatory consolidation, said the Fed’s authority to oversee bank holding companies remained “an open-ended question.”
Senator Bob Corker, Republican of Tennessee, said in an interview that the extent of the systemic risk council’s powers — not the council itself — required resolution. “There’s a lot of concern about having a regulator that roves around, picking up companies unaware they were going to be regulated by a new entity,” he said.
Senator Mark R. Warner, a Virginia Democrat who supports the idea of the Treasury-led council, said: “You need a vigorous, focused group. You don’t need to create some massive new bureaucracy, but a place to share information and do some level of analysis.”
Mr. Bernanke said at a hearing in October that he supported a Treasury-led council. In a speech last month, he said the Fed was “working not only to improve our ability to identify and correct problems in financial institutions, but also to move from an institution-by-institution supervisory approach to one that is attentive to the stability of the financial system as a whole.”
- Find out why St. Louis Fed President James Bullard thinks Bernanke has accepted too much blame.
Others in the Fed, including William C. Dudley, president of the Federal Reserve Bank of New York, have argued that the central bank is uniquely positioned to be an overall risk regulator because of its role as the lender of last resort and as the nerve center of capital markets and payments systems.
In a speech on Tuesday, Narayana R. Kocherlakota, president of the Minneapolis Fed, said: “Stripping the Federal Reserve of its role in supervision is a step in the wrong direction. Making it the systemic risk regulator is a step in the right direction.”
If anything, the Senate is moving in the other direction, not only to give oversight of systemic risk primarily to the Treasury but also to rein in the central bank’s regulatory powers.
“Let the other traditional regulators focus on direct banking regulation and have the Fed focus more exclusively on monetary policy,” said one committee member, Senator David Vitter, Republican of Louisiana. “It’s not like they have a small or unimportant portfolio.”
Senator Judd Gregg, Republican of New Hampshire, disagreed. “I’m in the distinct minority on the committee in that I want the Fed to retain a lot of its powers in regulation,” he said. “I think that’s also Treasury’s position. It’s clearly not Dodd, Shelby or even Corker’s position.”
Mr. Dodd and Mr. Corker, who have been spearheading talks over the regulatory overhaul along with the committee’s ranking Republican, Richard C. Shelby of Alabama, left Wednesday on a trip to Central America. While Mr. Dodd said the trip was related to their work on the foreign relations committee, other senators said they hoped the two men would arrive at a consensus by the time they returned Monday.
Even if Mr. Dodd’s committee and the leaders of the two parties in the Senate agree on the systemic risk regulator, there are deep divisions over other components of any legislation, and it is not clear what shape a package might take.
Among them is whether to create a consumer financial protection agency that would regulate credit cards, mortgages and other products. The House included creation of the agency, which has President Obama’s support, in its overhaul, but Senate Republicans have balked at the idea.
Also under discussion are two recent White House proposals to rein in the size and scope of banks, but some senators have suggested they are aiming to defer debate on them for now.
Representative Barney Frank, a Massachusetts Democrat who is chairman of the House Financial Services Committee, predicted that the consumer agency would be the chief sticking point as the Senate talks proceed.
“There will be an entity in charge of systemic risk — which no one now has the responsibility to do — and the consequence of identifying systemic risk will be immediate remedial action to put that institution out of its misery,” Mr. Frank said.
But some in the Fed remain skeptical. James Bullard, president of the St. Louis Fed, said in an interview that Mr. Bernanke had been “too kind” in accepting blame for regulatory failings, given the failings of other regulators, from the Federal Deposit Insurance Corporation to the Office of the Comptroller of the Currency.
“If he’s giving up, it’s because he’s somehow making some calculations about what the realities are,” Mr. Bullard said.
“But I’m telling you, this business of how we’re going to give this to a committee and we’re going to have an effective response to the next crisis. That is a joke.”