CHICAGO — The Federal Reserve needs authority to dig deeper into the subsidiaries of holding companies ranging from Goldman Sachs to GMAC and American Express, Chairman Ben Bernanke argued Thursday.
Congress already has a long to-do list as it considers financial services industry reforms, but Bernanke said it also must rework the Gramm-Leach-Bliley Act of 1999.
"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."
Bernanke's idea was just one of many bandied about here Thursday as regulators, academics and industry representatives gathered at the Chicago Fed's annual bank structure conference to discuss ways out of the financial turmoil.
Federal Deposit Insurance Corp. Chairman Sheila Bair again campaigned for authority to resolve financial institutions; some argued that the size of banks should be capped, and others countered that the regulatory structure should not be changed at all.
The Fed chief's push for broader authority over bank holding companies came a day after Bair won support from key senators for creating a council of regulators to oversee systemic risk. The Fed has long been viewed as the leading candidate to gain systemic oversight powers, but Senate Banking Committee Chairman Chris Dodd has been reluctant to go along with the idea and was intrigued by Bair's suggestion.
She reiterated the merits of such a council here Thursday.
"As I see it, the council should have a more macro perspective and the authority to overrule or force actions on behalf of other regulatory entities," she told those at the conference. "It should have the authority to establish consistent capital standards throughout the system to prevent excessive leverage and the painful de-leveraging that follows."
Bernanke hinted that he supports a systemic risk system that involves several regulators but expressed concern that it could get bogged down in debate, thwarting effective action.
"The intellectual case for having a broader, systemwide perspective is clear at this point," he said. Still, a council should be structured "in a way that's not meaningless. It needs to be clear what the expectations are," he said, and the architects must "make sure accountability lines up in a way that makes sense."
It was clear that the idea of systemic regulation still evokes anxiety in the industry. Bair was asked whether the government would publicly identify companies considered systemically significant, which some have argued would give big banks a leg up over their smaller peers.
"You need to have some identification of those who could be and those who are," Bair responded. "It's hard not to define the broad parameters."
Widespread resistance was evident to the notion of shrinking the size of institutions to prevent them from threatening the broader economy.
Raghuram Rajan, a finance professor at the University of Chicago, said, "Some work can be done on preventing institutions from becoming systemically important." But that work would probably be messy and could curb some of the benefits big banks supply to the economy, he said.
"Many of the ways of doing this are crude and have systemic costs," he said. "Size can imply greater diversification, which can reduce systemic risk."
Speaking on the same day that regulators in Washington unveiled the much-anticipated results of the stress tests, many thoughts centered on banks' capital levels. The tests' whole point was to encourage banks to build cushions against future losses, but Hal Scott, the director of Harvard Law School's program on international financial systems, said more capital and regulation do not result in less risk.
"It's fair to say that capital requirements have proven completely inadequate," he said. "The most intensive and detailed area of regulation — capital — has not worked. More regulation therefore does not necessarily translate into less systemic risk."
Feelings that the industry is under siege were palpable at points during the day. Bernanke's speech was interrupted by a protester screaming for an end to the Fed.
"In these circumstances, it's very hard for the authorities to fight allegations of crony capitalism," Rajan said later. "The public senses two sets of rules — one for the systemically important and the other for the rest of us."
Diane Casey-Landry, the chief operating officer and senior executive vice president of the American Bankers Association, said the industry has gotten a bad rap.
"The name 'bank' has been sullied," she said, arguing that the banking system does not need tougher regulation since many of the worst practices occurred at nonbank institutions.
"We don't see a problem with the existing bank regulatory structure," she said. " 'Shadow banks' were not regulated the way the banking system was."
Still, there was a sense that substantive regulatory change is inevitable. Charles Evans, the Chicago Fed's president and chief executive officer, probably echoed the thoughts of many bankers when he said that policymakers should "not seek change simply for the sake of change. Don't throw out what works for what does not."