Key regulators on Thursday broke with the Obama administration, reaffirming their belief that some new powers to monitor big institutions against financial threats should go to an interagency council, not the Federal Reserve.
Some Republican lawmakers also continued to warn against endowing the Fed with new powers in an overhauled system as Congress slogs through a complex deliberation that could reshape the financial landscape in the wake of a historic crisis.
Under the administration's financial overhaul proposal, the central bank as "systemic risk regulator" would be able to duplicate and even overrule other regulators.
But Securities and Exchange Commission Chairman Mary Schapiro and Sheila Bair, head of the Federal Deposit Insurance Corp., stressed to the Senate Banking Committee that that crucial role should be played by the new stability oversight council. The body would include the Treasury Department, the Fed, and the two independent agencies headed by Bair and Schapiro.
Bair and Schapiro appeared before the panel a day after the administration sent Congress legislation that would make the Fed the supercop of the U.S. financial system, as well as create the new oversight council to boost coordination among regulators and raise capital requirements for financial institutions. If enacted, the administration plan would bring the most sweeping overhaul of financial rules since the 1930s.
In the House, Republicans introduced an alternative Thursday. Their bill would make bankruptcy an easier option for winding down larger financial institutions that are not banks. It also would create a single regulator for all banks, stripping the Fed of its supervisory role and abolishing two Treasury Department agencies, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
The administration plan similarly calls for creating a national bank supervisor that would absorb the functions of the two agencies.
While the Republican proposal is unlikely to receive a vote, it could influence the talking points of Republicans in the Senate, where procedural rules give the minority party a bigger role in shaping legislation.
Bair testified that an interagency council with strong and extensive authorities "will provide for an appropriate system of checks and balances." A council "with real teeth ... would be highly effective," Bair said. It would be "tremendous" power to invest in a sole regulator, she said.
Schapiro told the panel that the new council "must be strengthened well beyond" what is envisaged in the administration's plan.
Paul Stevens, president and CEO of the Investment Company Institute, the mutual fund industry's biggest trade group, urged Congress to "create a strong systemic risk council." Putting the bulk of systemic risk authority in the Fed "strikes the wrong balance" and would mark "worrisome expansion of the Federal Reserve's authority over the nation's entire financial system," he said in testimony following the two regulators.
With an eye to ending the "too-big-to-fail" approach that proved disastrous as the government rushed in to bail out large banks, Bair maintained that "market discipline" would come from the FDIC having authority to shut down and resolve financial institutions — including the bank holding companies now under the Fed's jurisdiction.
The new council should designate institutions as posing a potential threat to the system and bring them under its supervision, Bair said. That "should be a stigmatizing designation, not something that is favorable," she said.
Sen. Richard Shelby of Alabama, the committee's senior Republican, said expanding the Fed's powers as called for in the administration's plan "could be very dangerous" and "inconsistent with the principles of democratic government."
A number of lawmakers of both parties insist that the Fed failed to prevent the economic crisis and shouldn't be entrusted with more responsibility but should stay focused on its primary duty of setting monetary policy.
Fed Chairman Ben Bernanke told the Senate panel Wednesday that he doesn't believe the central bank's role under the administration's proposal would be "radically different" than its current one.
Bair also endorsed the proposed creation under the Obama plan of a consumer finance protection agency to oversee areas such as mortgages and credit cards — an idea fiercely opposed by the financial industry. But she did express concern that around a quarter of the bank examiners now at the FDIC, already stretched in the current crisis, could be transferred to the new agency.
Bernanke on Wednesday said those consumer protection responsibilities should stay with the Fed.
When the history of the financial crisis is written, "There's going to be a lot of blame to go around," Fed Gov. Daniel Tarullo said at Thursday's hearing as senators criticized the central bank's oversight prior to the meltdown. No single agency is capable of preventing disastrous risks to the financial system, he said.