Facing skeptics, Treasury chief defends regulatory overhaul

Senate Banking Committee members Thursday criticized Treasury Secretary Tim Geithner's proposal to make the Federal Reserve a super-regulator that would monitor for systemic risk throughout the financial system - a key platform of the Obama administration's plan to revamp the nation's regulatory framework.

Banking Committee ranking member Richard Shelby, R-Ala., disputed Geithner's contention that the Fed is the only agency that could ensure the failure of one firm would not bring down others and cripple markets. Such a position "reflects a grossly inflated view of the Fed's expertise," Shelby said.

Shelby listed all the roles the Fed performs, such as setting monetary policy, monitoring bank regulation and providing consumer protection.

"These responsibilities conflict at times and some receive more attention than others. I do not believe that we can reasonably expect the Fed or any agency to effectively play so many roles," he said. The comments by Shelby, whose support will be critical to move a bill on a bipartisan basis, reflected many GOP concerns over the Obama plan.

A former president of the New York Fed, Geithner is fighting for the central bank to play the role of sole super-regulator. Some lawmakers have called for a council of regulators to play such a role, but Geithner dismissed that notion, saying, "You don't convene a committee to put out a fire."

But realizing congressional resistance, Geithner made some concessions. He proposed that a council of regulators advise the Fed on its proposed role; that Treasury have the power to sign off on any new emergency lending; and that responsibility for consumer protection be shifted from Treasury to a new agency.

Sen. Mark Warner, D-Va., suggested a more robust council approach because it would bring in expertise from areas outside the Fed's mandate. For example, the SEC would provide knowledge on securities issues, and the council could deploy a staff solely focused on evaluating systemic-risk issues.

By contrast, Geithner's proposed council "has the ability to gather information but does not have the ability to act in any way. It will not provide the nonsilo approach that I think we are looking for," Warner said.

Sen. Robert Menendez, D-N.J., agreed with Warner and asked Geithner what would happen if one agency or the full council disagreed with the Fed. Geithner responded that his plan contains checks and balances, with the council having to send reports to Congress. In addition, he said, its recommendations would be public, which would help lawmakers carry out oversight responsibilities.

Sen. Robert Bennett, R-Utah, said he opposed a proposed change in the Bank Holding Company Act that allows commercial firms to charter or acquire industrial loan companies, which are state-chartered banks that offer limited financial services. The Geithner plan would require all businesses that control an insured depository institution to be subject to Federal Reserve supervision. ILCs are major business in Utah. "In this proposal you are killing one very major source of credit where there has been no difficulty with respect to the -- the crisis," said Bennett. "You said we're trying to deal with those that were essential to the crisis. I'm talking about ILCs."

Geithner replied the administration wanted all depository institutions under a single regulatory framework to prevent firms from migrating to one with lower standards.

Another GOP critic, Sen. David Vitter of Louisiana, pushed Geithner to include a revamp of Fannie Mae and Freddie Mac, but the Treasury secretary indicated that would come next year.