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Obama administration faults Senate bank bill

The Obama administration on Friday pushed back against a proposal in the U.S. Senate to create a single bank super-regulator and strip the Federal Reserve of its supervisory powers.
/ Source: Reuters

The Obama administration on Friday pushed back against a proposal in the Senate to create a single bank super-regulator and strip the Federal Reserve of its supervisory powers.

Deputy Treasury Neal Wolin firmly backed the Fed as the premier banking regulator in a speech to lawyers, saying this function was critical for its role as a lender of last resort.

"No regulator had a perfect record leading up to the crisis," Wolin told an American Bar Association committee. "But in our view, the Federal Reserve is the agency best equipped for the task of supervising the largest, most complex firms."

Senate Banking Committee Chairman Christopher Dodd Tuesday proposed consolidating bank supervisory powers into a single agency, which would strip the Fed of its role as a direct bank supervisor.

Lawmakers are shaping far-reaching legislation to prevent a repeat of the financial crisis that nearly paralyzed the banking system last year.

Dodd's proposal went beyond a separate effort moving through the House of Representatives Financial Services Committee. Whatever emerges in the House and Senate will need to be reconciled before going to President Barack Obama to sign into law.

Wolin did not mention Dodd by name, but he said the Fed's supervisory role gave it a deep understanding of and timely access to information about the banking sector, payment systems and capital markets. He added this was important for its role as lender of last resort.

"Stripped of its supervisory role, the Fed would not have timely and complete information in a crisis," said Wolin, who has taken a lead role for Treasury in negotiating reform legislation with Congress.

Legislative delay
White House economic adviser Austan Goolsbee, also speaking Friday, said Dodd's proposal may take too long to implement.

Speaking at a forum sponsored by Bloomberg, Goolsbee characterized Dodd's plan as creating an agency similar to Britain's consolidated regulatory agency, the Financial Services Authority, which has come under some criticism for failing to rein in risky activity.

"I would say first as a general statement they had a lot of problems in the UK, as well, so I don't think the division of what box goes where is the central" issue in creating a strong regulatory framework, Goolsbee said.

"I am a little worried that to create that new agency would take a long time," he added.

A spokeswoman for Dodd rejected the notion that Dodd's proposal would create a U.S. version of the FSA.

"The Dodd proposal actually empowers the Federal Reserve with new authority to get inside institutions to collect information as needed directly from the financial institutions and from other regulators to properly execute monetary policy," said spokeswoman Kirstin Brost.

The Fed, the U.S. central bank, has drawn sharp criticism from lawmakers for its failure to spot trouble brewing with risky lending practices before the crisis and its efforts to prop up the financial system when trouble struck.

Risking taxpayer money
Many lawmakers are worried that its emergency support for American International Group and other large financial firms has put U.S. taxpayer money at risk.

Wolin said there was "plenty of room for honest differences on the details of various plans. But there should be no disagreement about the urgency of reform."

He said the critical components remain a new agency to protect consumers in financial dealings as well as a mechanism that would allow the government to step in and unwind failing large financial firms to limit damage.

Bank of England Governor Mervyn King and former Fed Chairman Alan Greenspan have said banks deemed "too big to fail" should be broken up.

Wolin said the Treasury favors paying the costs of unwinding such big financial institutions through a mechanism that assesses fees after the event on large institutions -- those with more than $10 billion in assets. He added the Treasury was working with House members on the funding mechanism.

Representative Barney Frank, chairman of the House Financial Services Committee, has favored creating a fund that would exist prior to any financial firm shutdowns, while Dodd's proposal includes post-event funding, an approach advocated by Federal Deposit Insurance Corp. Chairman Sheila Bair.

Treasury officials have said a pre-failure insurance fund could create moral hazard by giving bank investors and creditors the impression that the fund is there to bail them out in times of stress.