WASHINGTON — A day after House Financial Services Committee Chairman Barney Frank pledged to move quickly on a bill to hand systemic risk authority to the Federal Reserve Board, Senate Banking Committee Chairman Chris Dodd cast doubt on the idea.
Though he said the creation of a systemic risk regulator was important, he raised concerns that the central bank has not done a good job with the power it currently has, and that a new role could compromise its independence.
"We must be mindful of ensuring the independence and integrity of the Fed's monetary policy function," Sen. Dodd said. "Some have expressed a concern about overextending the Fed when they haven't properly managed their existing authority, particularly in the area of protecting consumers."
At a hearing on regulatory restructuring, the Connecticut Democrat also said he is considering merging all banking regulators into one.
"We cannot afford a system where regulators withhold bold and necessary action for fear that institutions will switch charters to avoid stricter supervision," he said. "We should consider whether a single prudential regulator is preferable to the alphabet soup of regulators we have today."
Speaking later to former Fed Chairman Paul Volcker, a witness before the Banking Committee, Sen. Dodd blamed the Fed for not predicting the housing crisis.
"Can someone explain to me why there wasn't someone sounding the alarms from the Federal Reserve System?" he asked.
Mr. Volcker responded, "When things are going well, nobody wants to hear about regulation. "
Sen. Richard Shelby of Alabama, the top Republican on the Banking Committee, asked Mr. Volcker whether the Fed should be given systemic risk oversight.
Though he did not respond directly, Mr. Volcker sounded a note of caution.
"You will have a different Federal Reserve if the Federal Reserve is going to do all the regulation from a prudential standpoint," he said.
"You have to consider whether that's a wise thing to do when their primary responsibility is monetary policy."
Sen. Shelby also asked whether it would make sense to separate banking regulation from monetary policy — the model used in the United Kingdom.
But Mr. Volcker said that model has not fared well.
"That was rather widely acclaimed, but when they had a crisis, they found out it didn't work so well," he said. "Supervision and regulation has implications for the performance of the financial system and the economy. … That is one of the reasons for giving the Fed responsibility for both."