WASHINGTON — With the stress tests now complete, policymakers are turning their attention back to regulatory restructuring — and the inevitable turf war is brewing.

As Federal Deposit Insurance Corp. Chairman Sheila Bair lobbied Capitol Hill last week for enhanced resolution powers and the creation of a systemic risk council, Comptroller of the Currency John Dugan was making the opposite pitch.

In an interview, Dugan argued that the FDIC is not qualified to resolve systemically important institutions, and he said giving more power to the Federal Reserve Board, not a council, would be the best way to supervise the largest financial institutions.

"We can't have a committee do everything," he said. "I worry about that being too diffused and not being accountable, not providing enough accountability in a single place."

The Fed is clearly part of this debate, as well. Chairman Ben Bernanke has endorsed letting the FDIC resolve systemically important companies that get into trouble, but he has not taken a firm position on the idea of a council or said directly that the Fed should have sole oversight of systemic risky firms.

That leaves Bair and Dugan to square off, and the dynamic is all the more interesting because the comptroller has a seat on the FDIC's five-member board. Regardless, the agencies have long been rivals, and Dugan made it clear that he does not think the FDIC should get all the power Congress is contemplating handing it.

"I wouldn't want the FDIC's focus on banking and the insurance fund diverted now to have to sort of get expertise in all of these other areas in the chance they may get into trouble one day," he said. "I would worry it would create almost a shadow systemic risk regulator as a possible consequence. If you have a rule that had the FDIC in charge of all of it, they would today be running Fannie Mae and Freddie Mac, AIG, Bear Stearns, Lehman Brothers potentially. Is that really what we want the FDIC doing?"

Dugan does say the FDIC should handle institutions being broken apart or wound down. But if the government decides to keep running a failed institution, as it does with bridge banks or when it puts companies into conservatorship, then the FDIC should take that role only with banking companies, he said, not with nonbank firms.

"For example, if it were Fannie or Freddie, you might want their regulator to do it," Dugan said. "If it were an insurance company, you might want to appoint the Federal Reserve to do it. I think you need to have more flexibility when you get to that point as to who you are going to have do what."

Bair has said she is confident the FDIC could take on the added responsibility of resolving any company that poses a systemic risk without a loss of focus on its primary mission. She has suggested creating a separately branded division that would oversee the resolution of systemically important institutions to avoid potential confusion among depositors.

She argues that the FDIC should have such power because it is the only agency with relevant experience to resolve troubled large firms.

"The FDIC is up to the task, and whether alone or in conjunction with other agencies, the FDIC is central to the solution," she said in a speech last month.

Michael Krimminger, special adviser to the FDIC chairman for policy, told American Banker that the agency is "the only agency with proven expertise" in closing large financial services companies. "We would need additional assistance, and would call on the experts at the SEC, the Fed, other agencies and contractors. But the FDIC has a proven track record in dealing with financial insolvencies."

Krimminger also said it "makes no sense to turn to different agencies for different types of firms, because that would create inconsistent results."

Bair bucked conventional wisdom last week by suggesting the creation of a regulatory council that could set capital standards, follow risky products and find ways to harness market discipline over systemically large institutions. The council would include the FDIC, the Fed, the Treasury Department and the Securities and Exchange Commission, she said.

Her idea quickly caught on with senators, who have appeared reluctant to give systemic risk oversight entirely to the Fed.

But Dugan said that a single regulator is the only way to ensure proper oversight, and that the central bank should have that job.

"Most of the systemically important banks are bank holding companies right now, and right now the Fed plays a systemic regulatory role with respect to those companies," he said. "It's the natural thing to do to just extend the role of the agency that is already doing this kind of work with respect to a class of institutions. I think the Fed has certain expertise that it draws on that no other agency has by virtue of its closeness to the capital markets, because of its open markets operations and its international activities."

Dugan concedes that the Fed does not have all the experience it would need, but he said the leap it would have to make is smaller than the FDIC's.

"For example, if you take AIG, it's true the Fed didn't know a lot about insurance, but they knew a lot about derivatives and derivatives supervision and the kinds of things AIG was involved in," he said. "They would know about many of the things that AIG was doing, and yet they had no window into that company. So I see that as a smaller extension. I am not trying to set up the Fed as better than the FDIC. That is not my point."

Dugan's comments highlight the intense turf battles that agencies fight whenever regulatory restructuring moves to the fore.

For Dugan, the current debate is very familiar. In 1991, as a Treasury official under President George H.W. Bush, he oversaw a regulatory restructuring study that called for stripping the FDIC of its bank supervisory authority, among other things. The report also called for doing away with the separation of banking and commerce, the creation of financial services holding companies and breaking down the walls between securities, insurance and banking.

Some of the ideas formed the basis for what later became the Gramm-Leach-Bliley Act of 1999. Others, including shifting the FDIC's supervisory responsibilities, stalled.

So far the Obama administration has been focused on only one piece of regulatory reform: how to deal with systemic risk. The Treasury is expected to release a report this year outlining ways to enhance consumer protection and consolidate agencies.

Dugan is skeptical about a piecemeal approach.

"It's a concern if you focus on one piece — let's call it systemic risk," he said. "How many shots will you get to do it on the Senate floor?"

Though Dugan is well aware that attempts to combine regulators have failed in the past, he said regulatory consolidation would make sense. "I understand why people think there are too many" regulators, he said. "We don't have four FDAs. We don't have four FAAs. It's kind of hard to justify."

Most formulas for reform would put one agency in charge of "prudential supervision," or the job of making sure companies are operating safely.

By process of elimination, Dugan leaves little doubt he thinks that role should be filled by the Office of the Comptroller of the Currency.

The Fed should not have that power, he said, because of its monetary policy functions and its potential to become the systemic risk regulator, and the FDIC should stay focused on protecting the Deposit Insurance Fund. That leaves the OCC and the Office of Thrift Supervision, which has been blamed for the failures of several large thrifts.

"We do have expertise, and I am a believer in the model of having something like the OCC … [as] a prudential supervisor," he said. "It's important to have an agency focused on the heart of what we do, whatever structural change that we do."

The ultimate goal of restructuring is also different for Dugan. Though Bair has said changes need to be made to eliminate "too big to fail" banks, including potential caps on size, Dugan said breaking up the largest banks would be problematic.

"I just worry in order to make something so small that they could guarantee they wouldn't require systemic risk resolution, they'd be so small that they couldn't serve the basic functions of the economy of larger institutions and bigger businesses in the United States," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.