WASHINGTON — The drive to give the government the power to unwind systemically important nonbanks gained more momentum Tuesday after Federal Reserve Board Chairman Ben Bernanke suggested offering such authority to the Federal Deposit Insurance Corp.
In response to questions from lawmakers at a House Financial Services Committee hearing, Bernanke said a proposed systemic risk regulator did not need to be the same agency that has resolution powers. "The FDIC or some other body could be in charge of resolution and deal with those specific issues."
House Financial Services Chairman Barney Frank is working with the Obama administration to pass a bill that would give the government resolution powers.
The Fed and the Treasury Department have each submitted legislative proposals to Frank's office to establish authority similar to what the FDIC currently has over failing banks and thrifts for systemically important firms and bank holding companies.
After the hearing, Frank said he was still examining the issue, though a committee vote could come next week before Congress adjourns for a two-week recess. The Massachusetts Democrat would not offer any specifics on his bill, including whether he agreed with Bernanke that resolution and oversight responsibilities should be separated and whether the FDIC would be the right place to vest resolution power.
Expanding the FDIC's resolution powers gained traction last week after Senate Banking Committee Chairman Christopher Dodd, D-Conn., said that the agency had considerable experience in resolution matters already, and that lawmakers should consider expanding its power. FDIC Chairman Sheila Bair, testifying last week, said it would be a relatively simple expansion to cover bank holding companies.
Frank said his bill to provide resolution powers would be the opening salvo in redrawing the financial regulatory map.
"The resolution thing will be kind of the first step. … This will be what happens when things go bad," he said. "The next step is how to keep it from going bad."
But the issue is still the subject of considerable debate. During the hearing, Treasury Secretary Timothy Geithner said resolution powers should give a regulator the same authorities the FDIC has over banks, including the ability to provide financial assistance to make loans, renegotiate contracts, purchase obligations or assets, assume or guarantee its liabilities and purchase an equity interest. He also said any resolution decision would involve multiple agencies.
"Before taking emergency action, the Treasury secretary would need to determine that resolution authority is necessary upon the positive recommendations of the Federal Reserve Board and the appropriate federal regulatory agency," he said.
Though Geithner did not specify where the authority should be vested, Rep. Mel Watt, D-N.C., asked if the Treasury wanted the power for itself.
"This … seems to me to suggest to me that basically the secretary of the Treasury would be the interim systemic risk regulator du jour for things outside the banking industry," Watt said. "Am I misreading that?"
Geithner responded: "I did not mean to imply that, but you are right that we are thinking about how to balance this going forward. We can't put all this on the Fed."
The Fed remains the primary candidate to assume regulatory oversight of systemically important nonbanks. Though Bernanke did not officially call for such power to be given to the central bank, he laid out a definition of a systemic risk regulator that strongly resembled the Fed.
"What's needed would be a strong oversight regulator who would be able to look over all the aspects of the company for all systemically relevant companies," he said.
The Obama administration is expected to provide more details on its plan for a systemic risk regulator and resolver when Geithner testifies Thursday before the Financial Services Committee.
Tuesday's hearing also delved into other areas, including executive compensation policies for financial companies. There was broad agreement between Frank, Geithner and Bernanke that compensation plans rewarding activities that are potentially too risky for the system would be curbed as part of the regulatory overhaul.
Several lawmakers asked Geithner and Bernanke when they knew about the American International Group Inc. bonuses that have created such a firestorm.
Despite some press reports that regulators were privy to the compensation plans as yeearly as last fall, both Bernanke and Geithner repeatedly said they found out the full details March 10, though they both acknowledged that more advanced notice might not have helped much. Both said they had reviewed all legal means to block the payouts.
Rep. Brad Sherman, D-Calif., urged Geithner to create and release a chart detailing bonus compensation at any institution that received funds from the Troubled Asset Relief Program.
"I don't think the American people should be blind-sighted and told about bonuses on Saturday that get paid out on Sunday," Sherman said. "Mr. Secretary, are you going to give us the chart, or are you going to hide the ball?
Geithner said: "I'm not going to hide the ball. … I will think carefully about your proposal."
The lack of commitment sparked "boos" from protestors sitting in the audience.
During the hearing Rep. Gresham Barrett, R-S.C., questioned whether Congress' steps to go after AIG bonuses through a retroactive tax increase might undermine the government's ability to entice private capital. "Who in their right mind would want to enter into a contract with the U.S. government?"
Both Geithner and Bernanke said such concerns are justified.
"We do need to provide some assurances … that there will not be retroactive changes," Bernanke said.
The hearing also took aim at the administration's plan for encouraging investors to buy troubled assets with government support.
Rep. Michael Capuano, D-Mass., told regulators during the hearing that he was worried putting the FDIC in charge of overseeing loan auctions for toxic assets would put the agency (and thus taxpayers) at risk.
"The FDIC as I understood it was there to protect" depositors, he said. "That's what they are they for, yet in this case they are being used to finance the purchase of toxic assets. … I think you are jeopardizing the FDIC fund."
Frank defended the plan to reporters.
"If I thought the FDIC was going to be endangered, I would have those concerns, and I did raise that with them," he said. "They are totally insulated from any failure."