Administration Debating Powers of Proposed Systemic Risk Regulator

By | May 28, 2009

The Obama administration is weighing if a new systemic risk regulator should have the power to conduct on-site examinations of banks, broker-dealers and other market players suspected of posing a threat to the U.S. financial system, a source familiar with the Treasury Department’s thinking told Reuters on Wednesday.

While there is agreement among policymakers that an overarching risk-monitoring entity is needed, questions abound about the structure and whether the entity must rely on existing regulators to collect information, the source said.

The source spoke on condition of anonymity because he was not authorized to speak for the administration and because the proposal is not finalized.

The administration has already sought industry’s support for the Federal Reserve to take on a central role in regulating financial risk that could have a wide impact on the economy.

But a key issue is whether a systemic risk regulator should be given the authority to push aside other regulators such as the Securities and Exchange Commission, the Office of Thrift Supervision and state insurance regulators, to conduct on-site examinations and other supervisory activities, the source said.

Such power may be needed to keep the risk regulator accountable, which may not be possible if it has to rely on other regulators for information, said the source.

The Treasury Department will release a comprehensive regulatory reform proposal in the next few weeks, the source said.

The administration has already sent Congress a legislative “resolution authority” proposal on empowering a government agency to seize and unwind large non-bank businesses that are in trouble. It has also offered a general plan for cracking down on the over-the-counter derivatives market.

It is unclear whether the administration will release a detailed proposal that includes all these components.

The administration can offer proposals but it is up to Congress to pass legislation that the U.S. president then signs into law.

The crowded field of existing financial regulators includes the SEC, OTS, Federal Deposit Insurance Corp, Commodity Futures Trading Commission, the Office of the Comptroller of the Currency and state insurance departments. Each agency has varying degrees of power to inspect the financial books and records of the companies they regulate.

For example, the Fed, in addition to setting monetary policy, oversees bank holding companies like Bank of America .

FDIC Chairman Sheila Bair has urged the creation of an interagency council of regulators supervising system-wide risks. But that approach is not favored by Treasury Secretary Timothy Geithner, who wants a single independent regulator with responsibility for systemically important firms and critical payment and settlement systems.

Geithner, however, believes there is a role for a council to coordinate among various regulators, including the systemic risk regulator, a Treasury Department spokesman has said.

Geithner has taken a lead role in overhauling U.S. financial regulation after regulatory lapses and excessive risk-taking led to the worst economic crisis in decades. Also deeply involved in the effort are National Economic Council Director Lawrence Summers, Deputy Treasury Secretary Neal Wolin and Assistant Treasury Secretary Michael Barr.

(Reporting by Rachelle Younglai; Editing by Tim Dobbyn)

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