WASHINGTON — House Financial Services Committee Chairman Barney Frank said Thursday that to muster the political support necessary to stabilize the financial system with additional government resources, lawmakers are going to have to get tough on bankers.
The Massachusetts Democrat said he plans to bring back, strengthen and quickly pass through the House reforms that failed to reach enactment in the last Congress that would beef up consumer protections in areas like mortgage lending, credit cards and overdraft.
He also laid out more details on his plan to construct a systemic risk regulator, and he said it will move in tandem with the consumer protection bills.
"Bankers aren't going to like it, but they have to understand this," Frank said at a press conference. "There will not be the political support in this country to do further things to try and get the credit system flowing … unless we show the American people that it is not all simply worrying about their psyche, and there is some need to protect people from further … abuses."
He said the reforms were already paramount but have gained more urgency because the Obama administration is sure to need additional money to stabilize the system. President Obama said last week that he was liable to seek additional funds, and his budget called for $250 billion more.
But the administration is likely to receive public support for such a move only if Congress has taken action to rein in bankers' most egregious practices, Frank said.
"It's especially important right now, because to a lot of citizens, what they see is the financial institutions, which possibly caused a lot of the problems we are now in, being the beneficiaries of government assistance," he said.
Frank said he is planning to toughen legislation passed in 2007 that would set mortgage underwriting standards and establish liability for securitizers that package a loan.
He also said he plans for the House to pass Rep. Carolyn Maloney's credit card bill that would prohibit increasing interest rates on outstanding debt, ban double-cycle billing and lengthen the time between when bills are mailed and payments are due.
Although banks have made strides in making overdraft programs more transparent, Frank said they have not gone far enough. "Much of these abuses have been curtailed but you can't guarantee that it's not going to happen again," he said. "Overdrafting is clearly a profit item… and there is I think some concern about that that we are going to address."
Frank also said the committee plans to hold at least four hearings this month on regulatory restructuring, with the goal of fleshing out how a systemic risk agency would function.
Any systemic risk regulator would eliminate the ability to securitize a loan or asset 100% by establishing risk retention standards, he said; it also would set restrictions to prevent financial players from becoming overleveraged, and it would set executive compensation standards that prevent excessive risk taking from being part of the compensation structure.
The risk regulator would have the power to unwind major nonbank institutions like investment banks, Frank said. "A systemic risk regulator is clearly empowered to stop people from getting overleveraged, from getting so indebted they can't pay their debts, and the fact that they can't pay their debts costs other people."
Frank said he still stands by his belief that the Federal Reserve Board is best equipped to handle such a task, but he acknowledged that his committee must consider some concerns about the central bank's independence.
"It's a little late to worry about the absolute purity... of the Fed, given the role they have played with the Talf," Frank said. "The Fed has played a very active role in intervention in the economy — a more active role than I think we would expect to do with regulation that does not appear to have impinged on their monetary policy, but it's still an important thing to look at, and I think the answer is you do it carefully."
Creating a new regulator would take too much time, he said. "You could say if we started from scratch, you'd get a better regulator. I don't think we can stop the world long enough for that to happen."
Frank also said the committee would bring in the Federal Bureau of Investigation, state attorneys general, the Securities and Exchange Commission, bank regulators and other enforcement officials for a hearing on investor fraud March 20. He said he wanted to hear plans "to prosecute those people whose irresponsible and in some cases criminal actions helped bring about this crisis."
