WASHINGTON — Senate Banking Committee Chairman Chris Dodd is actively considering a regulatory reform bill that would create a single federal regulator for financial institutions, stripping supervisory powers away from existing agencies, according to sources on Capitol Hill.
The bill — which, sources cautioned, remains a work in progress and could be derailed by several factors — also would likely create an interagency systemic risk council rather than give such oversight to the Federal Reserve Board, as the Obama administration has advocated.
Dodd's committee is working to finish a draft soon, with the hope of passing a bill this year, sources said.
But whether this version will survive hinges on whether Dodd decides to give up his Senate Banking chairmanship in order to run the Health, Education, Labor and Pensions Committee. A new banking chairman would probably tweak the bill and could even take a new approach. Though Dodd's final chairmanship decision is unknown, speculation has grown in recent days that he would move to the health panel.
Sen. Tim Johnson — the most likely candidate to succeed to the banking panel's chairmanship — is more moderate than Dodd on many issues and could opt to start over.
Still, the discussion now underway is the best picture to date of the status of reform in the Senate Banking Committee. Capitol Hill sources said the bill under discussion would differ from the Obama administration's reform plan in several areas.
For one, though the administration has recommended eliminating the Office of Thrift Supervision and merging it with the Office of the Comptroller of the Currency, the committee's tentative plan would go much further, stripping supervisory powers from the Fed and the Federal Deposit Insurance Corp.
These powers would then be vested in a single bank supervisory agency.
Though this idea is already opposed by community banks, who fear a single agency would be biased in favor of the largest institutions, it enjoys significant support in the Senate banking panel.
Dodd most recently raised the idea of a consolidated regulator during an Aug. 4 hearing, but it was unclear then how hard he would push for it.
"Is the administration's proposal really enough, or should we be listening to previous administrations … that greater consolidation should be the next step?" Dodd asked on Aug. 4.
During the same hearing, several committee members, including Sens. Charles Schumer, Jon Tester, Mel Martinez, Mark Warner and Jack Reed, gave weight to the idea.
"Creating a new, consolidated prudential regulator would bring all such oversight under one agency, streamlining regulation and reducing duplication and gaps between regulators," said Reed, a Rhode Island Democrat who also is considered to have a shot at becoming committee chairman should Dodd step aside.
"It would also bring all large, complex holding companies and other systemically significant firms under one regulator," Reed said, "allowing supervisors to finally oversee institutions at the same level as the companies do to manage their own risks."
Though the administration did not suggest such a plan, it may embrace it.
The Treasury Department considered recommending the creation of a single bank supervisor before it unveiled its plan but decided this would be too politically difficult.
That may still prove true. The Fed and FDIC both oppose giving up their supervisory powers, arguing, respectively, that they need them in order to conduct monetary policy and as the deposit insurer. Community bankers see such a concept as the beginning of the end of the dual banking system because they see the Fed and FDIC as more community bank-oriented. State-chartered banks may see little value in maintaining a state charter if they are to be regulated by the same federal regulator as the largest institutions.
House Financial Services Committee Chairman Barney Frank also said earlier this summer that creating a single prudential supervisor would be a mistake.
Whether Johnson could support such a plan is unknown, but the South Dakota Democrat has traditionally been a community bank advocate and is likely to be much more sympathetic to their concerns.
The Senate Banking Committee's bill is also likely to differ from the Obama plan in how it tackles systemic risk oversight. For months committee members on both sides of the aisle have criticized the Fed's credibility, questioning the administration's rationale for suggesting it serve as the systemic risk regulator and repeatedly urging that an interagency council be given more teeth.
Sen. Richard Shelby, the panel's lead Republican, appears particularly opposed to giving the Fed more power — and Dodd is negotiating with Shelby in the hope of winning GOP support.
As a result, several panel members are leaning toward a bill that would create an interagency council to oversee systemic risk. The Obama plan includes such a council but would give it no real power.
The bill is likely to give the Obama administration something else it has been seeking — a consumer protection agency — but the details are still being worked out. For one, the committee's bill is highly unlikely to compel banks to offer standard or "plain-vanilla" products before more complicated products.
Though the administration has lobbied for the concept, several panel members have said it is problematic because a one-size-fits-all model does not easily translate to loan offerings based on an individual's credit and other criteria.
"Plain-vanilla seems unworkable," said a senior Democratic aide.
Less clear is what happens to preemption, or the practice of allowing national banks to ignore state laws that conflict with federal statutes. The Obama plan would eliminate preemption and force national banks to comply with state laws, as well as face enforcement from state authorities.
Any final Senate bill is unlikely to go that far. Moderate Democrats and Republicans on the committee are unlikely to support a bill that eliminates preemption, sources said.
The bill is also expected to be a comprehensive plan that includes ways to address "too-big-to-fail" institutions by expanding resolution powers to nonbanks and bank holding companies and imposing tougher capital standards on the largest and riskiest companies.
It would also incorporate executive compensation standards to better tie pay to performance, overhaul the credit rating agencies, improve insurance oversight and tighten regulation of derivatives.