WASHINGTON — A little over a year ago, House Financial Services Committee Chairman Barney Frank was openly threatening to strip some of the Federal Reserve Board's power because of a poor record on consumer protection.
By Thursday, the Massachusetts Democrat had completed an about-face, saying his first agenda item next year would be the largest expansion of central bank authority in decades.
"We should be moving to empower the Federal Reserve to have regulatory authority over a wide range of financial institutions in recognition … that they have a systemic impact," he said at his panel's first hearing on regulatory restructuring. "The current situation puts the Fed in the untenable position of being [unable] to respond when it doesn't have the full plate of tools."
The hearing was a switch from even four months ago, when Rep. Frank said there needed to be an agency tasked with systemic risk, but was not sure if that power should go to the Fed. On Thursday, he had clearly made his choice.
"I don't see any alternative to the Federal Reserve," he said.
He also signaled he was willing to give the Treasury more power.
During testimony before the committee Thursday, both Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke asked lawmakers to bolster the Treasury's role in overseeing the resolution process for failed investment and securities firms, as well as other entities that lack federal deposit insurance but which pose a systemic risk.
"We will need to give our regulators additional emergency authority to limit temporary disruptions. … Any potential commitment of government support should be an extraordinary event that requires the engagement of the Treasury Department," Mr. Paulson said.
Mr. Bernanke said "it would be appropriate for the Treasury to take a leading role in any such process, in consultation with the firm's regulator and other institutions."
Rep. Frank said after the hearing that he would "probably" agree to give the Treasury that role, but said it would be the subject of thorough examination.
"If I knew the answer to that, we would already have the bill," he said. "That's one of the things that we are going to be studying."
But Rep. Frank also used the hearing to dispel any speculation Congress would rush to overhaul the regulatory system this year.
Several members from both political parties, including Reps. Paul Kanjorski, D-Pa., Mike Castle, R-Del., John Campbell, R-Calif., and Jackie Speier, D-Calif., questioned whether recent events warranted emergency legislation.
They pointed particularly to concerns about the Fed opening the discount window to investment firms, which do not have the same supervision as commercial banks, and the Fed's rescue of Bear Stearns Cos.
"There probably is some action that we should take in the committee sooner than later as it relates to the authority of the Fed over investment banks, because another Bear Stearns can happen," Rep. Speier said. "It can happen in the next six months while we are campaigning for reelection, and if it's as important as you say it is to get some authority in place, which is very clear, I would think that that would be one priority."
But Rep. Frank cut her off.
"It is a disservice to suggest that there is a shortfall in their authority now," he said. "We have sufficient power now to get through the crisis. We do not have sufficient power now to avoid some of the crisis, and I think that is an important distinction."
He added that "what we are looking for are rules that will make the crisis less likely, and I think that is a very high priority. I hope that early next year that we will be able to complete it."
Mr. Paulson agreed that acting hastily would be imprudent, acknowledging changes are not needed until next year, but he also cautioned against taking too much time.
"Work should begin immediately and urgently on these issues," he said.
Lawmakers raised other concerns with waiting, however.
Rep. Michael Capuano, D-Mass., told Mr. Bernanke that he and other lawmakers would have more peace of mind if the Fed would lay out its general conditions for investment bank access to the discount window.
"The Fed has lent out more than $3 trillion, which is more than you lent out in the previous six" months, he said. "I think it's the right to way to go, but it's a huge amount of money, and all that money is going out with minimum at best, if any, requirements."
He said that the Fed should "put very clear, very concise conditions" on discount window borrowing, and wanted those conditions to be public.
Mr. Bernanke responded by saying that the process for investment firms is more ad hoc than it is for commercial banks, but that the Fed and the SEC are ensuring prudent lending.
"We are doing very much the same kind of things between the Fed and the SEC and the investment banks that we and other regulators are already doing for commercial firms, so there is a quid pro quo that if we are going to lend to you, you have to take [certain] steps," he said.
Rep. Frank said he plans to hold a series of hearings on regulatory reform.
Securities and Exchange Commission Chairman Chris Cox and New York Fed President Timothy Geithner would testify before the panel in two weeks, he said.