WASHINGTON — Some daylight emerged Thursday between Treasury Secretary Tim Geithner and House Financial Services Committee Chairman Barney Frank over whether systemically important institutions will be publicly identified.
The two men worked closely on legislation to tighten supervision of these large, complex companies and to set up a system for unwinding them if they got into financial trouble.
Frank introduced the bill on Tuesday and favors keeping the names of these institutions private.
"There will be no identification of a systemically important institution until the hammer falls on it," Frank said at a hearing Thursday. He said the committee would vote on the bill next week, perhaps as early as Nov. 4.
But at the hearing, Geithner, regulators and other lawmakers said it would be impossible to keep the public from knowing which institutions the government considers too big to fail.
"It won't be a secret that they're held to tougher standards," Geithner said. "It's very important that they are held to the tougher standards and you know that they're held to tougher standards."
Federal Reserve Board Gov. Dan Tarullo added, "Through some disclosure to shareholders and analysts, it's likely most, if not all institutions, will be known to the public."
Rep. Spencer Bachus of Alabama, the committee's ranking Republican, agreed.
"It's foolish to assume such a list will be kept secret," Bachus said. "Are we so gullible as to believe that the regulatory authorities for eight government agencies will be able to impose increased capital requirements and a host of other regulatory constraints on the so-called identified firms without market participants quickly figuring out which firms are on the list?"
But Frank said publishing a list of these companies would exacerbate the risk of moral hazard.
"There's the argument that, once people know that certain institutions are of a certain size, they'll be protected," the Massachusetts Democrat said. "That's why many of us rejected the notion that there be a list published beforehand. … There will be no notification to the public or privately that a particular institution is in that category without simultaneous restrictions on the institution."
About his last point, there was no dissent at the hearing. Everyone agreed that systemically important companies should face plenty of restrictions. The legislation would create a systemic risk council, chaired by the Treasury Department and made up of the financial regulators, to monitor risks to the financial system and to decide which institutions should be designated as systemically important.
But it would be the Fed's job to actually oversee systemically important institutions and to write the rules governing their operations.
Some lawmakers said the legislation does not go far enough to end "too big to fail." They said the government should simply break up these institutions.
"If we're going to have that kind of a transfer of authority, it seems to me it's the obligation of the Treasury to come forth and say how we're going to prevent this … by really curtailing and tailoring down the size of the institutions — particularly the financial institutions — of this country, so that we cannot have systemic risk," said Rep. Paul Kanjorksi, D-Pa.
Frank said the legislation would resurrect the Glass-Steagall Act on a case-by-case basis by allowing the Fed to restrict a bank from certain activities it determines pose a systemic risk.
"It's in here an ability to take the kind of restrictions that existed under Glass-Steagall nationwide and impose them institution by institution. … Precisely the purpose of this bill is to give [regulators] powers to do more of that than they now have," Frank said.
Some lawmakers voiced concerns over vesting too much authority in the central bank. The Fed has been criticized in the wake of the financial crisis for not intervening earlier.
"For the last several months, it was my impression that there was a developing consensus that the Federal Reserve should be given less power, not more," said Rep. Scott Garrett, R-N.J. "But in reading over this discussion draft … I'm just struck by how much power the Fed is given."
Kanjorksi echoed those concerns.
"I'm not a man that fears this administration or you," he told Geithner. "But I do fear the accumulation of power exercised by someone in the future that can be extraordinary."
The legislation also would allow the Fed to override primary prudential regulators — something Comptroller of the Currency John Dugan opposed. "We believe this expansion of authority is too broad," Dugan said.
But Tarullo said the Fed is the appropriate place for these enhanced authorities.
"Chairman Frank's discussion draft addresses each of these areas and, in the Board's view, provides a strong framework for achieving a safer, more stable financial system," Tarullo said.
Lawmakers also debated how best to resolve systemically important companies in trouble.
Under the bill, the Treasury would decide when an institution should be placed into receivership and the Federal Deposit Insurance Corp. would carry out the liquidation. The costs would be covered, in part, by fees assessed after the fact on institutions with more than $10 billion of assets.
Lawmakers suggested the process should be inverted, levying an assessment before a failure.
Rep. Luis Gutierrez, D-Ill., recommended creating a separate fund similar to the Deposit Insurance Fund, with systemically important institutions prepaying resolution costs.
"Most of us don't die and then buy a life insurance policy," Gutierrez said.
FDIC Chairman Sheila Bair agreed. "We believe in a prefunded reserve," she said.
But Geithner took the opposite position. "If you create a fund in advance, there's a risk you're going to create more moral hazard," he said. "People will live with the expectation where the government will come in and protect them. We don't want to create that expectation. That's why we think it's better to do it after the fact."