WASHINGTON — As President Obama prepared to give a speech Wednesday afternoon outlining his plan for regulatory reform, the Treasury Department began circulating a 85-page white paper that contained new, concrete details about the proposal.
Under the plan, the Federal Reserve Board would have sweeping new powers to dig into all facets of a bank holding company, statutory restrictions on interstate branching by commercial banks would be lifted, and the central bank would be required to get approval by Treasury before using its emergency powers.
Already clear by Tuesday afternoon were other sweeping proposals, including the elimination of the thrift and industrial loan company charters. The white paper goes even further, calling for the elimination of all specialty charters, including credit card banks, trust banks, and so-called "nonbank" banks. Under the administration's plan, all such institutions would be required to convert within five years to bank holding companies under the purview of the Fed.
The administration's plan calls on the Fed to conduct regular stress tests of institutions and consider capital levels on a consolidated basis — not just at the depository institution. The proposal would abolish the Office of Thrift Supervision, toughen consumer protection and require new disclosures from financial institutions. That includes the creation of a consumer protection agency, which would have the power to directly examine banks and subject institutions to new safeguards.
By far the largest beneficiary of the plan is the Fed, which would have the right to examine all systemically important institutions and write new capital rules for such firms.
Critically, the Obama administration is also proposing to remove restrictions on the Fed's power over bank holding companies that were enacted by the Gramm-Leach-Bliley Act of 1999.
"The GLB Act impedes the Federal Reserve's ability, as a consolidated supervisor, to obtain information from or impose prudential restrictions on subsidiaries" of a bank holding company, according to the administration's white paper, a copy of which was obtained by American Banker.
The constraints "make it difficult to take a truly firm-wide perspective on a BHC and to execute its responsibility to protect the system as a whole."
The suggested revision of Gramm-Leach-Bliley, the last major overhaul of the banking sector, symbolized just how much power the Fed stands to gain from the latest regulatory shakeup. Just last month, Chairman Ben Bernanke told an audience in Chicago that provisions of the law should be revisited.
"The crisis has demonstrated that effective and timely risk management that is truly firmwide is vitally important for large financial institutions," he said. "In its review of the U.S. financial architecture, we hope that the Congress will consider revising the provisions of Gramm-Leach Bliley to help ensure that consolidated supervisors have the necessary tools and authorities to monitor and address safety and soundness concerns in all parts of an organization."
The changes envisioned by the White House would allow the Fed to "require reports from, examine, or impose higher prudential requirements or more stringent activity restrictions" on holding companies, according to the white paper.
The blueprint does check the Fed's expanding powers in at least one respect. The Fed would need to obtain the Treasury Department's permission before using the emergency lending powers it has relied on through the financial crisis to prop up firms like American International Group Inc. and introduce numerous liquidity facilities.
Fed officials have defended their use of the authority. Fed Gov. Elizabeth Duke said Monday that without it, "we would have had a much, much worse outcome."
Still, if such a check had been in place during the financial crisis, it may not have made much difference. Bernanke is believed to have acted in lockstep with former Treasury Secretary Henry Paulson when he invoked the Fed's emergency power.
But the change would tie the Fed more closely to the Treasury, threatening its independence, and could open the door to lawmakers to place further restrictions.
Questions have also been raised about whether the regional Federal Reserve Banks are worthwhile in a world of consolidated banking. The white paper requires the Fed to submit recommendations on the role of the regional banks by Oct. 1 and the Treasury would decide how to proceed from there.
If any agency receives a black eye from the White House white paper, it is the OTS, which the administration said exercised a "more limited form of supervision and regulation." The report also noted that, unlike the Fed's supervision of bank holding companies, the OTS does not impose capital requirements on thrift holding companies.
While the administration's plan dissolves the OTS and eliminates the thrift charter, it does give one benefit of being a savings and loan to commercial banks: unrestricted branching powers.
"We propose the elimination of the remaining restrictions on interstate branching by national and state banks," the white paper says. "We propose that states should not be allowed to prevent de novo branching into their states, or to impose a minimum requirement on the age of in-state banks that can be acquired by an out-of-state banking firm."
All consumer protections and deposit caps for interstate banking would remain intact.
But the white paper does leave plenty of questions.
A major impetus for regulatory reform has been the lack of authority to unwind failing nonbank financial companies or bank holding companies in an orderly fashion. Yet the administration lacks a straightforward action plan for resolution and instead gives the Treasury a great deal of subjective latitude.
It recommends that the FDIC resolve bank holding companies, and would also have back-up examination over bank holding companies.
For other financial firms, the proposed resolution regime is modeled on the "systemic risk exception" contained within the FDIC's resolution regime, which lets it depart from the least cost resolution standard when financial stability is at stake.
The process could be initiated by the Treasury, the Fed, FDIC, or by the Securities and Exchange Commission when the largest subsidiary of the failing firm is a broker-dealer or securities firm.
The authority to decide whether to resolve a failing firm under the special resolution regime should be vested in Treasury, which could only invoke the authority when consulting with the president and with written recommendation of two-thirds of the FDIC board.
The plan says Treasury should generally appoint the FDIC to act as conservator or receiver, unless the company is mostly a broker-dealer in terms of assets, in which case the SEC would get that role.
The conservator or receiver would have coordinate with foreign counterparties and could decide whether to sell off part of it or its assets to a bridge institution or other entity, including derivatives.
Other highlights of the administration proposal include:
- Calls for the creation of a systemic risk council chaired by the Treasury Department. The new council would include the Office of the Comptroller of the Currency, the FDIC, the Fed, the SEC and the Federal Housing Finance Agency. It would make recommendations on systemic threats to the system and report annually to Congress, but it would not have the power to overrule the Fed.
- The consumer protection agency would have sole federal power over consumer protection rule writing and enforcement with power to examine financial firms, enforce current consumer protections on unfair or deceptive acts or practices and could require new data collection including under the Home Mortgage Disclosure Act.
- The Fed would be given oversight of payment, clearing and settlement systems of financial firms.
- Hedge funds with assets above an unspecified threshold would be required to register with the SEC.
- Treasury would establish an Office of National Insurance, with advisory authority only. The future of federal insurance regulation is not handled in detail by the white paper, which instead says the administration will develop more in a subsequent proposal.
- The future of Fannie Mae, Freddie Mac and the Federal Home Loan Banks is left unclear. The administration says it will develop recommendations for the 2011 fiscal year budget.
- Regulators would be directed to promulgate executive compensation standards designed to ensure bonuses and other perks do not reward excessive risk taking.
- The SEC would strengthen its regulation of credit rating agencies and increase regulation of all over the counter derivatives including credit default swaps. The SEC and Commodities Future Trading Commission must make recommendations to Congress on changes to harmonize securities and futures markets.
- Ahead of the G-20 summit in London, the Treasury will propose international anti-money laundering standards.