WASHINGTON — House Financial Services Committee Chairman Barney Frank said Tuesday that he plans to split reform of financial services regulation into two parts, focusing first on handing systemic risk authority to the Federal Reserve Board.
The Massachusetts Democrat said he would return later in the year to a broader overhaul of the system, including the creation of a financial product safety commission and the consolidation of other banking regulators.
But he said his immediate focus is on improving oversight of companies considered integral to the proper functioning of the nation's financial system.
"The biggest issue for the near term … is dealing with systemic risk," he said. "There have been too few restraints on major financial institutions' incurring far more liability than they could handle, and the No. 1 job will be to empower some federal entity to be a systemic risk regulator."
During a press conference to outline his 2009 agenda, Rep. Frank said he would continue to work with the Obama administration to reduce foreclosures and thaw frozen credit markets, enact legislation that improves mortgage underwriting and reforms the securitization markets, and seek to dilute preemption rules that have blocked states from playing a stronger role in consumer protection.
Though debate has arisen on whether to give the Fed additional authority, Rep. Frank said "an emerging consensus" has appeared that the Fed "will be given power to do systemic risk regulation covering all forms of financial activity and they'll have some flexibility as to what the reach is."
Defining what constitutes systemic risk will probably be left to the Fed, he said.
"You can't define it too specifically legislatively because, if you do, then people will get around it," he said.
The committee will vote "in the first half of the year," but Rep. Frank said he doubted the bill would be enacted by the time of the G-20 meeting in early April.
Though the Bush administration recommended last year that the Fed take on the role of systemic risk regulator, it also said the central bank should be stripped of its direct bank supervisory role.
But Rep. Frank said the Fed should keep bank oversight in addition to its new powers.
"One of the things I think we've agreed is, monetary policy is informed in part by the regulatory" aspect, he said.
Though he offered few details on what a systemic risk regulator would do, he said it should have the power to close any institution under its jurisdiction.
"Amongst the powers they have to get is to be able to close down any of the firms regulated in the way that banks can now be closed down by the FDIC," Rep. Frank said. The absence of such authority, he said, led to confusion over what to do about Bear Stearns and Lehman Brothers as they imploded.
Rep. Frank also said the systemic risk regulator should be able to clamp down on executive compensation schemes that encourage excessive risk-taking.
Broader regulatory reforms — including reducing the number of regulatory agencies — will wait until later in the year, he said. Rep. Frank declined to specify how such a shake-up would take place.
"Whether any of them need to be buffed up, coordinated better, etc., I think is phase two," he said. "Phase one is creating the systemic risk regulator."
Rep. Frank has previously said that it would make sense to merge the Office of the Comptroller of the Currency and the Office of Thrift Supervision and also to combine the Securities and Exchange Commission and the Commodity Futures Trading Commission. But Tuesday he said doing so would lead to jurisdictional fights that are best left to later in the year.
"These people have constituencies, and that's why I want to break out first the systemic risk thing because those are tougher issues," he said. "Secondly, the other question is: Are there ways to rationalize relationships without abolishing?"
He said he also planned a closer look at a financial product safety commission, an idea championed by Elizabeth Warren, the Harvard law professor who leads the congressionally appointed panel overseeing the Troubled Asset Relief Program.
Rep. Frank called the weakening of state consumer protections a "mistake." He said he has pushed Treasury Secretary Tim Geithner, with whom he met on Monday, to persuade the comptroller of the currency to ease the preemptions of state consumer protection laws in some areas. "Under the Bush administration the federal government exercised its preemptive powers to cancel virtually all state regulation in the consumer area," he said. "I think that's a mistake, and I think it has diminished consumer protections, and I told the secretary I expect that we will go back at that and reallocate that. States do a better job."
Rep. Frank said he does not need to change the law if he can pressure the OCC to change its stance. "We don't need statutory changes if the comptroller is willing to do that," he said. "We are talking about areas where the statute probably allows preemption but does not mandate it."
He also plans to return to subprime mortgage reform, Rep. Frank said, including strengthening a bill the House passed two years ago that died in the Senate.
He said he would ban yield-spread premiums and increase penalties on securitizers that act "inappropriately," among other changes.
Rep. Frank said he also plans to seek reforms that ensure securitizers cannot offload all risk.
"Some requirement that securitizers retain a certain percentage of what is securitized becomes more and more practical to me as I think about it," he said.
He said he remains committed to helping the Obama administration stem the fallout from the housing crisis and stop foreclosures. He declined to offer many clues on the administration's plans for administering the rest of the Tarp but said a foreclosure mitigation plan under development would be comprehensive, including assistance from Fannie Mae, Freddie Mac, the Federal Deposit Insurance Corp., and the Fed.
He said he spoke this week with Ken Lewis, the chief executive of Bank of America Corp., and Vikram Pandit, the CEO of Citigroup Inc., about extravagant bonuses and corporate jets. The Financial Services committee is scheduled to hold a hearing Feb. 11 with the CEOs of the first nine recipients of Tarp funding, including Citi and B of A.
The CEOs need to show they are not being imprudent with taxpayer dollars, he said. Stories about executive perks have made consumers angry and unless perceptions change lawmakers will be unable to do much to legislate further help to banks.
Rep. Frank said he has been telling bankers: "Here's the problem: People really hate you, and they are starting to hate us just for hanging out with you. And you have to help us deal with it. You have to avoid being stupid."
"They have to be clear on how they are spending the Tarp money," he said.
Rep. Frank said bankers are starting to get it. "I think you are going to see a very interesting hearing next week."
He also said he recognizes that policymakers send a mixed message by insisting that banks be safe and sound and at the same time that they increase lending.
"We want them to be safe and sound, and we want them to lend more, and those don't always tilt in the same direction," he said. "We have to find the right balance between encouraging them to lend but not lending to anybody in a dangerous situation."