House Financial Chair Frank Calls for U.S. Financial Risk Regulator

March 20, 2008

The chairman of the House Financial Services Committee called Thursday for Congress to consider creating a “financial services risk regulator” with broad powers across a wide range of financial institutions.

Addressing the recent financial turmoil that brought down investment bank Bear Stearns Cos Inc, Rep. Barney Frank said Congress could consider authorizing the Federal Reserve to act in the role of risk regulator.

In a document outlining a speech to be given to the Greater Boston Chamber of Commerce, the Massachusett Democrat said it was important to bring under scrutiny new financial players and older institutions that are doing new things.

“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,” said the speech outline.

Frank proposed that if non-bank institutions wanted access to the Fed’s discount window for cash, they would be subject to requests from the risk regulator for timely market information and be subject to inspections.

“Congress should seriously consider establishing (or empowering the Federal Reserve to act as) a ‘Financial Services Risk Regulator’ that has the capacity and power to assess risk across financial markets regardless of corporate form and to intervene when appropriate,” said the outline of Frank’s speech.

Frank also called for a reassessment of capital, margin and leverage requirements, saying the current credit crisis had illustrated that seemingly well-capitalized institutions can be frozen when liquidity runs dry and particular assets lose favor.

The Fed allowed investment banks to borrow directly from it in steps announced Sunday to arrest a crisis of financial confidence that forced Bear Stearns to sell itself to JPMorgan Chase & Co.

But access to the Fed’s discount window has sparked speculation of a change in how investment banks are regulated.

The Securities and Exchange Commission currently regulates investment banks such as Bear Stearns, Goldman Sachs Group Inc , Lehman Brothers Holdings Inc, Merrill Lynch & Co Inc and Morgan Stanley.

The Treasury Department is currently studying if the U.S. regulatory structure for banks, securities, commodities and insurance needs to be changed on the federal and state levels.

A final “blueprint” report with recommendations are expected within several weeks.

Treasury spokeswoman Jennifer Zuccarelli did not dismiss Frank’s suggestions but said the department was close to finalizing its blueprint.

“Treasury has been reviewing our regulatory structure over the last year and we welcome thoughts as we near completion of our recommendations for broad changes to the financial regulatory structure,” she said.

Frank called for reforming the regulatory system saying there should be consolidation of overlapping regulatory structures, which is among options Treasury is considering.

The suggestions come as Frank is also pressing Treasury to open discussion on his plan to boost government involvement to aid the troubled housing market. His plan would create a new program to provide Federal Housing Administration guarantees for up to $300 billion in affordable mortgages to refinance distressed homeowners and prevent foreclosures.

The Treasury said on Wednesday it is not interested in negotiating on that plan. It prefers to strengthen a coordinated private-sector effort among mortgage lenders, servicers and investors to modify loan terms.

(Additional reporting by David Lawder; Editing by Tom Hals)

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