WASHINGTON — House Republicans' plan to subject all federal regulators to the congressional appropriations process is alarming industry observers, who argue it could hurt both banks and consumers.
A bill by House Financial Services Committee Chairman Jeb Hensarling would go beyond just subjecting the Consumer Financial Protection Bureau to the appropriations process — long a goal of Republicans — and upend the funding of the all the agencies. While many banking groups quickly cheered the idea, some warn it could end up subjecting financial institutions to a more volatile regulatory environment.
"I fear that if you took all the regulators and make them subject to appropriations, you effectively would have a whipsaw effect depending on the political party that is in charge of the House, Senate and the White House," said Michael Krimminger, a partner at Cleary Gottlieb Steen & Hamilton and former general counsel at the Federal Deposit Insurance Corp. "The markets value stability and predictability, and this uncertainty could negatively affect public confidence and market stability."
He is backed by former FDIC Chairman Sheila Bair, a Republican, who said the congressional process would allow lobbying groups too much influence over the agencies.
"There are many things to like about Chairman Hensarling's bill, particularly its tough capital requirements," Bair said. "However, subjecting the banking agencies to congressional appropriations is not a good idea. Past history has shown that appropriations bills present ripe opportunities for industry lobbyists to wreak havoc with the funding resources of their overseers."
The drive to subject the agencies to appropriations is relatively recent. A decade ago, Republicans led the charge to push the Office of Federal Housing Enterprise Oversight — then the regulator of Fannie Mae and Freddie Mac — to be independently funded.
At the time, Fannie and Freddie were able to call on allies in Congress to wreak havoc with OFHEO's funding, hampering its ability to oversee the government-sponsored enterprises. When OFHEO was eliminated in 2008, the successor agency — the Federal Housing Finance Agency — was not subject to the congressional appropriations process.
But observers don't need to look to the past to see how congressional appropriations might interfere with a regulator's ability to do its job. Many point to the Securities and Exchange Commission and the Commodity Futures Trading Commission, both of which have been limited by congressional battles over their budgets. A House appropriations bill passed out of committee last week would reduce the SEC's funding by $50 million from 2016 and is $226 million below the Obama administration's request.
During testimony Tuesday before the Senate Banking Committee, SEC Chair Mary Jo White said the lack of funding has slowed rulemaking and that the agency is being outspent on the IT side by the firms it regulates.
"The SEC is significantly under resourced for our responsibilities," White said. "What I try and do is I respect the appropriation process, the congressional oversight process, and try and make the best case for more and adequate resources."
To be sure, Hensarling's bill would keep the Federal Reserve Board's monetary policy activity off budget, while putting the central bank's supervisory authority along with the FDIC, the Office of the Comptroller of the Currency and the CFPB on budget.
The Texas Republican argued in a speech earlier this month that doing so was essential.
"The bare minimum level of accountability to 'We the People' is to have their elected representatives in Congress control the power of the purse, as inscribed in our Constitution," he said.
Some observers agreed with Hensarling's logic.
"One of the reasons why we have checks and balances is to moderate swings," said Todd Zywicki, a law professor at George Mason University. "When banks are trying to make loans to the realm of 30-year fixed-rate mortgages and that sort of thing for example — should the pendulum swing so much from one administration to the next? One of the things Congress does is to stabilize and dampen those swings over time."
But others — even those sympathetic to Hensarling's other provisions in his bill — said the appropriations measure was a mistake.
"I am concerned about more political oversight of the bank supervision process because I think that encourages whoever is in power in the House and the Senate to take a more active role," said Oliver Ireland, a partner at Morrison & Foerster, who said he is largely supportive of the Hensarling bill. "I am not sure that makes sense in the long run."
Justin Schardin, acting director of the Bipartisan Policy Center's Financial Regulatory Reform Initiative, said the regulators' ability to act swiftly also prevented the 2008 financial crisis from inflicting maximum collateral damage. If their funding is tied up, that may not be possible, he said.
"It is best to just look at the track record at the different agencies that have been self-funded and particularly in a crisis when it matters most," Schardin said. "They just have to have that independence to head off a much larger degree of economic damage."