WASHINGTON — The future shape of the financial regulatory system became clearer Thursday as top Democrats outlined their priorities and Republicans united behind their own reform plan.
In an interview, House Financial Services Committee Chairman Barney Frank said he agreed with his GOP colleagues on three crucial measures: eliminating the Office of Thrift Supervision, limiting the emergency powers of the Federal Reserve Board and restricting the role of the credit rating agencies.
"Weakening the statutory power given to the rating agencies, I very much agree with that," Frank said in response to a Republican plan unveiled Thursday. "That is, various statutes say that various [entities] can't do things unless they hit certain ratings, and they want to repeal all that. I agree with that. The other thing we seem to agree on is abolishing the OTS."
Frank's comments came as Senate Banking Committee Chairman Chris Dodd said he was committed to creating an independent consumer protection agency that would be charged with regulating credit and bank products and guarding against predatory lending. In an unexpected twist, Dodd said the consumer regulator should be part of a proposed systemic risk council dedicated to evaluating potential problems at the largest institutions.
"I am committed to making this agency the centerpiece of my efforts as I work with President Obama and my colleagues to rebuild our financial architecture from the bottom up," Dodd said in a statement.
Though Dodd has indicated support for a systemic risk council and a consumer protection agency, he had not officially embraced either position until Thursday nor had he said they should be combined.
Frank has also endorsed the creation of a risk council and the new regulator, but both lawmakers left it unclear how a systemic risk council or consumer protection agency would work with existing agencies. The Obama administration is expected to unveil its regulatory revamping plan on June 17, and both a risk council and consumer protection agency are expected to be parts of it.
Republicans, meanwhile, were trying to get ahead of the issue by unveiling their proposal Thursday.
The Republican plan would strip much of the Fed's current authority, place all bank oversight under one regulator and preserve a bankruptcy process for nonbank institutions.
Instead of a systemic risk council, the GOP wants a less powerful "market stability and capital adequacy board." This board — including the Treasury secretary, other federal agencies that regulate large companies and "outside experts" — would report findings to regulators and other policymakers but lack enforcement authority over any company.
The Republicans warned that a powerful systemic-risk council would only produce more bailouts. "The Democrats' solution, as they've talked about, is to guarantee — guarantee — more bailouts through a systemic regulator," said Rep. Tom Price, R-Ga. "Their plan would establish a permanent bailout agency. The American people are sick and tired of bailouts, and so are we."
Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, said the plan has the backing of all House GOP members. In an effort to prevent further government interventions, the plan called for removing the Fed's power to provide aid, without Treasury approval, under its current "unusual and exigent" authority — and giving Congress a chance to veto any intervention. The Republican plan would also block the central bank from using its emergency powers for a single institution.
"No more bailouts," Bachus said. "Has anyone missed that? No more bailouts."
The Fed could not "use its emergency authority to intervene on behalf of a specific institution," and "the powers [could] only be used to create liquidity facilities that would be broadly available to a market sector," according to GOP language about the plan circulating on Capitol Hill.
With little power to affect legislation in the House, the Republican plan's potential impact was unclear. Frank was explicit that much of the Republican plan was dead on arrival.
"It's basically a nonproposal. … On consumer protection they've got a 1-800 number," said the Massachusetts Democrat in the interview. "They don't do anything about systemic risk. They don't do anything about derivatives. They don't do anything about hedge funds. … And I don't agree with taking away the supervisory powers of the FDIC and the Federal Reserve."
Still, he agreed that the OTS is unnecessary, and he favored some limits on the Fed's emergency powers, granted under section 13-3 of the Federal Reserve Act.
"I do agree with some restraints of the 13-3 part," Frank said. "That is one where there is some common ground as well."
Unlike Republicans, however, the Democrats are committed to creating a resolution process for systemically important institutions, including nonbank companies. The Treasury has suggested giving such power to the FDIC. Frank said the unwinding or operation of a failed company would lie with the FDIC but said any decision would likely involve other regulators.
"What I think you are going to see is, the FDIC will be the shock troops, the ones who actually do it because they are the ones that have experience," he said. "The primary regulator would be involved with triggering it."
The creation of a federal insurance charter remains on the table, Frank said, but perhaps in a separate bill.
"The question now on the federal charter for insurance is a very important consideration," he said, "but it may not necessarily be a part of this."
Frank spent much of his day dealing with how executive compensation would be handled as part of regulatory restructuring. At a hearing on the topic, however, the same partisan lines evident in the reform debate overshadowed much of the compensation discussion.
Though Frank said he is committed to legislation giving shareholders a nonbinding vote on pay packages as well as a ensuring that compensation does not create an incentive for excessive risk-taking, Republicans said the government should not be setting such standards. "The solution to any concerns regarding executive compensation practices is for the shareholders to vote for a change in management or take their investment dollars elsewhere," said Rep. Jeb Hensarling, R-Texas.
Frank was supported by Gene Sperling, a top adviser to Treasury Secretary Tim Geithner, and representatives from the Securities and Exchange Commission and the Fed who said the goal is to ensure that compensation does not reward risks that harm the company.