WASHINGTON — House Financial Services Committee Chairman Barney Frank said Tuesday that he is open to easing the fair-value accounting rules that financial services companies claim are not working, because they cannot establish market prices.
Though the Massachusetts Democrat signaled he does not intend to scrap mark-to-market accounting, he said he supported "flexibility" in their application.
"That will be part of our agenda next year," Rep. Frank said at a hearing on reforming financial services regulation.
He later told reporters that he has started compiling a list of the consequences of tweaking fair-value accounting rules.
"You could have some relaxation on your need to build up capital" for firms hit hard by mark-to-market accounting, he said. "Secondly, there are rules that some governmental bodies have that say people can only buy the paper from entities that meet a certain level. Well, if they've lost that because of mark-to-market, I don't want to make that happen."
Some changes would not need legislation, Rep. Frank said. "We could just urge the regulators to do it. You might have to do some legislation to give them some flexibility."
Industry representatives, who have repeatedly urged regulators to overturn the accounting rule, welcomed Rep. Frank's comments.
"What the chairman said makes a lot of sense," said Ed Yingling, the president of the American Bankers Association. "Disclose it, but don't let it hurt the institutions' ability to function."
The rest of the hearing produced less consensus. Though the government's efforts to rescue the industry have made regulatory restructuring an immediate priority, lawmakers seemed far from clear about how they would redraw the map.
The hearing, which featured academics and industry representatives, occasionally devolved into partisan bickering, with each side blaming the other for letting subprime mortgage problems grow. It also highlighted basic concepts that have been floating for several months.
Lawmakers and witnesses largely agreed on the need for an improved regulatory structure, though some suggested lax enforcement of the current rules was to blame for the credit crisis.
Rep. Frank said he was committed to trying to avoid one potential pitfall in creating a new regulatory system: turf battles between congressional committees with overlapping jurisdictions. He said he was open to forming a special congressional committee designed to tackle regulatory restructuring — an idea promoted by testifying academics.
"One of the things I'm most determined to do is not fight about turf," he said. " I think that's Congress at its worst."
Prof. Joel Seligman, the president of the University of Rochester, argued that a special task force would be better equipped to handle the topic comprehensively, since it could include issues such as credit default swaps, which fall under the House Agriculture Committee's jurisdiction.
"The most difficult issues in discussing appropriate reform of our regulatory system become far more difficult when multiple congressional committees with conflicting jurisdictions address overlapping issues," Prof. Seligman said.
Lawmakers are already under pressure to act swiftly next year on the issue. Representatives for House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., said it would be a top priority when the new congressional session starts in January.
However, any consensus about how to restructure the system is not yet apparent. During a round of questioning, Rep. Mel Watt, the chairman of the House Financial Services oversight subcommittee, put witnesses on the spot.
"How many regulators would you have?" the North Carolina Democrat asked. "And who would you put under their jurisdiction, or what would you put under their jurisdiction?"
Witnesses said they had not arrived at any final conclusions, though Rep. Watt drew out some key points. Together they ticked off areas where regulation should focus, including systemic risk, bank holding companies, and unregulated products like derivatives. But they differed even on the basic question of consolidation.
Alice Rivlin, a former vice chairman of the Federal Reserve Board and a senior fellow in the Brookings Institution's economic studies program, said she could not say how many regulators there should be, but she suggested combining duplicative ones.
"The number of regulators should be less than what we have now. We clearly have quite a lot of duplication," she said.
Joseph Stiglitz, a Columbia University professor of finance and business who won the 2001 Nobel Memorial Prize in economics, disagreed with that assertion.
"The issue isn't so much the number of regulators," he said. "The cost of duplication is low compared to the cost of failure. We need a system of checks and balance. I think duplication is fine. Overall, I think the general problem is we need to have somebody sitting on top looking at the whole system."
However, he said that gives rise to another problem — "regulatory capture." "I worry that we have one regulator like the Fed that will be captured by the investment community," he said.
During a second round of witness testimony, industry representatives offered their own priorities for reform.
Mike Washburn, the president and chief executive of Red Mountain Bank in Hoover, Ala., who testified on behalf of the Independent Community Bankers of America, pressed the point that the government should shrink institutions considered "too big to fail" and give them more oversight, since they pose a bigger risk to the system.
Letting four companies control more than 40% of the nation's deposits and more than 50% of its assets is "dangerous and unwise," Mr. Washburn told the committee.
"ICBA believes these institutions should be split up or required by the government to divest themselves of enough assets so that they cease to pose a systemic risk," he said. "ICBA supports a system of tiered regulation that subjects large, complex institutions that pose the highest risks to more rigorous supervision and regulation than less complex community banks."