The Federal Reserve Board would emerge as the dominant regulator of financial services companies if the modernization bill recently adopted by the House Banking Committee becomes law.
The bill would designate the Fed as the umbrella supervisor of financial services companies, making it the only regulator that could conduct on-site reviews of insurance companies, securities firms, and banks.
"The Fed is a big winner here," said Richard Whiting, general counsel to the Bankers Roundtable. "They have enhanced their position as the regulator over the financial services area."
In particular, the bill would authorize the Fed to:
Perform on-site exams of all bank holding companies and their subsidiaries. Insurance companies and securities firms that buy banks would be considered bank holding companies. Lawmakers urged, but did not require, the Fed to focus its reviews on subsidiaries that pose safety-and-soundness threats to the bank. The company must pay for the exam, which will stress compliance with banking laws, risk management practices, and financial health.
Require holding companies for insurance and securities firms to submit sworn statements attesting to their financial condition.
Review exam reports prepared by state and federal regulators of the holding company or any of its subsidiaries, including insurance and securities units.
"This ensures there is holding company regulation by the Fed," said one Banking Committee staff member. "But it provides flexibility. Nothing requires the Fed to be intrusive. It just allows the Fed to examine all subsidiaries."
The legislation would put limits on the central bank. For instance, the bill would prevent the Fed from assessing capital requirements on subsidiaries that already are subject to another supervisor's capital rules. This was intended to prevent the Fed from requiring an insurance company to increase reserves.
The central bank also would have to defer to the proposed National Council on Financial Services on some issues, such as deciding which products are banking services and which are insurance or securities activities. The council, which would consist of 10 federal and state regulators, also would have the authority to augment Fed restrictions on deals between holding companies and subsidiaries.
Banking and insurance industry officials objected to various provisions.
Bankers are upset that the Fed could require their holding companies to hold more capital than insurance and securities holding companies.
"Whatever authority the Fed may have should be equal over all holding companies," said Edward L. Yingling, chief lobbyist at the American Bankers Association. "The Fed should not be allowed to discriminate."
Insurers, however, are opposed to having the Fed set any capital requirements, including those for holding companies.
"It is not only unnecessary, it is completely unreasonable," said Allen R. Caskie, senior counsel for federal relations at the American Council of Life Insurers. "The whole purpose of state regulation of insurance companies is the regulation of solvency and capital. We have no need for the Fed."
The Fed also would not need to conduct on-site exams of insurance companies, he said.
"This is much more extensive than it needs to be," he said. "A lot of this stuff can be done by regulatory coordination."