A single line in the stimulus package the House passed last week could put the Federal Reserve Board on the road to becoming a systemic risk regulator.
A provision in the bill would create a lending facility through which broker-dealers can borrow money to buy Small Business Administration loans. The provision calls for the Fed to help designate "systemically important" broker-dealers.
"It is the first time I know of that the Fed has been charged specifically with identifying systemically important firms," said Mark Flannery, a professor of finance at the University of Florida. "There's been a lot of discussion about a financial stability regulator. I think many people think that will be the Fed, so identifying systemically important firms will become a very important part of that."
Observers said the language helps build a case for making the Fed a systemic risk monitor for the entire financial system.
"This is a venture of the Fed into the investment banking area, where one might have expected the Securities and Exchange Commission to be involved in the decision making," said Earnest Patrikis, a partner at White & Case LLP.
"I believe the Fed is already on its way to becoming the systemic risk supervisor, whatever that means," he said. "To me, I think, we're already there. But it will need to be fleshed out to see what that means and what power the Fed has. This is certainly a step in the right direction."
In March then-Treasury Secretary Henry Paulson released a regulatory restructuring plan. It called for a streamlining and consolidation of regulatory structures in the United States, and it would have expanded the Fed's powers, designating the central bank as a systemic risk regulator.
Mr. Paulson's plan received a mixed reception, but many say its echoes can be heard in the most current debates over the future of financial regulation.
"The question of whether monetary policy would be influenced by its impact on systemically important firms, that question's got to come up, and that's one of the reasons why some people think that separating monetary authority from prudential regulation, as they've done in England or Australia, whether they think that's a good idea," Prof. Flannery said.
Gil Schwartz, a former Fed lawyer who is now in private practice, said the provision is small enough that it will not attract much outside attention. However, "it will be something that people who are supporters of the Fed as a systemic regulator will point to and say, 'Look, Congress has already moved in that direction.' "
Richard Herring, a professor of finance at the University of Pennsylvania's Wharton School, called making the Fed a systemic risk monitor "more or less inevitable, given what has happened" in the past year. "It's really the only institution besides the Treasury that has the necessary money."
But unlike the central banks of other countries, the Fed has not taken on the role of monitoring systemic risk, Prof. Herring said. "In a way, it has been a bit behind its peers, almost all of which now publish financial stability reviews that attempt to anticipate systemic problems."
Broker-dealers who assemble SBA loans are not happy about having to be deemed "systemically important" to get cheap financing to buy new loans from lenders. They worry that the requirement would be an extra burden.
Fewer than a dozen firms purchase SBA loans and pool them to sell to investors, and those that could not obtain a "systemically important" designation would face significantly higher financing costs.
"You put them at such a competitive advantage with other dealers," said Scott Taylor, a vice president in Memphis for Shay Financial Services Inc., one of the 10 firms that actively purchase SBA loans from lenders and repackage them for sale to investors. "That concerns me — that language in there," Mr. Taylor said. "Could the argument be made that all 10 should be considered systemically important? Yeah, I think so."
