‘Council of regulators’ has no power over Fed

‘Council of regulators’ has no power over Fed

By Sarah O’Connor and Krishna Guha in Washington

The Financial Times, June 18 2009

The Obama administration’s plan for a “council of regulators” to monitor systemic risk is something of a sop to those who fear the Federal Reserve has won too much power in the regulatory overhaul, but Congress could yet give it teeth.

The new council, chaired by Tim Geithner, the Treasury secretary, would advise the Fed on its new role regulating systemically important institutions. It would be composed of the eight heads of the top regulators, including the new Consumer Financial Protection Agency. It would talk about emerging risks and how to co-ordinate policy, have its own staff at Treasury, and send a report to Congress once a year. But these responsibilities would not be supplemented with any power to enforce recommendations, or any veto over the Fed’s decisions.

Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, wanted the new council to be given regulatory authority over systemically important institutions. She failed to persuade the administration, but she has strong support in Congress, particularly in the Senate.

Some legislators made their disappointment clear to Mr Geithner on Thursday. Mark Warner, a Democratic senator who fears giving the Fed too much power, said: “I actually believe that the council . . . is really emasculated.”

Something similar to the new council already exists: the President’s Working Group, which consists of the heads of the Fed, Treasury, SEC and CFTC. Sometimes dubbed the “plunge protection team”, it was created by executive order in 1988 after Black Monday to help guard against financial market catastrophes.

Policymakers believe that, particularly in times of crisis, decision-making by committee would be too slow and unresponsive. They also say that unless responsibility for systemic risk is concentrated in one agency, no one will be accountable for the failure to address it.

But as the plan struggles its way into law, it is likely to change significantly. At one extreme, Congress could adopt Ms Bair’s plan. But something in between appears more likely. “I think there’ll be an effort to beef it up . . . you could imagine giving the council perhaps some veto authority, by two-thirds vote or whatever,” said Robert Liton, a senior fellow at the Brookings Institution.

The administration will try to defend the key points of its regulation plan, but how flexible will it prove to be over the powers of the council?

On Thursday, Mr Geithner signalled there was room for manoeuvre: “We have not claimed to get the details perfectly right on this, and it’s going to require a substantial amount of additional effort and care to get the balance right.”

Mr Liton believes the administration may be willing to compromise: “If it’s a big fat bill with a thousand pages and this is just one item, I can see why the administration wouldn’t veto it just over this,” he said. “If it gets the consumer protection agency, the resolution authority, derivatives, regulation…it may call it a day and say we’re happy with the result.”

Copyright The Financial Times Limited 2009