A key House Democrat is calling for tougher and broader regulations of the financial system after the fall of investment bank Bear Stearns.
Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, wants to give either the Federal Reserve or a new regulator the power to oversee the activities of major financial players, regardless of whether they are a bank, securities firm or hedge fund.
Frank, who made the proposal Thursday in a speech to a business group in Boston, also suggested that investment banks be required to hold cushions against losses, a mandate that currently only applies to commercial banks.
The concept, if enacted, could reshuffle the existing landscape of financial regulators, whose duties are split among several federal agencies, including divisions of the Treasury Department, the Fed and the Securities and Exchange Commission.
Lawmakers are due to return from a two-week recess later this month, and the events leading to Bear Stearns buyout will top many an agenda. Like Frank, other members of Congress aren’t waiting to return to the nation’s capital to weigh on Washington’s role in steadying the financial sector.
Some fear that the bargain-basement sale of Bear Stearns Cos. to JPMorgan Chase & Co., engineered by the Federal Reserve and Treasury Department, opens the door to more government efforts to aid troubled financial players, ultimately putting taxpayers at risk. The Fed, which is providing $30 billion in backing for that deal, could wind up turning a profit, but could also see its payments to the Treasury diminished if the investments it is backing do not pay off.
In addition, the Fed’s historic decision Sunday night to allow investment banks to borrow directly from the central bank through its discount window is heightening concerns that taxpayers will wind up on the hook for Wall Street losses.
Frank said in a prepared statement that, in exchange for giving investment banks access to lending from the Federal Reserve, the new regulator should be able to limit risky practices and “protect the integrity of the financial system.”
The call for a clearer window into the investment bank world resonated with commercial banks, which are more tightly regulated and whose depositors are insured by the Federal Deposit Insurance Corp.
“We do understand the concern about providing access to the discount window to institutions that do not have the same regulatory examination,” as federally insured banks, said Floyd E. Stoner, executive director for congressional relations and public policy at the American Bankers Association.
However, he added: “We also are always concerned about new, potentially intrusive regulation.”
Wall Street’s biggest lobbying group, the Securities Industry and Financial Markets Association, welcomed Frank’s comments, especially his focus on the overlap of existing regulations. Scott DeFife, the trade group’s senior managing director for government affairs, said in a statement that doing so could “help reduce the current turmoil and build a better regulatory future.”
Republicans are rolling out their own proposals, with Rep. Vito Fossella, R-N.Y., saying Thursday he will introduce legislation to reduce duplication among banking regulators, which he said makes it difficult to monitor risks to the system.
The Treasury Department has been working on its own plan for banking industry reforms over the past year. A department spokeswoman, Jennifer Zuccarelli, said in an e-mail that “we are considering all issues as we propose broad changes to our regulatory structure in the near and short term.”
Daniel Forte, president of the Massachusetts Bankers Association, said government backing for troubled investment banks should be coupled with stricter regulations. “If we’re going to put our money at risk, we should have some protections and greater oversight,” Forte said.