WASHINGTON -- Bank and thrift regulators told Congress Tuesday that they are already adequately regulating banks' derivatives activities and argued vehemently against legislation that would mandate further oversight.
"The administration's view at this point is not to encourage legislation," said Comptroller of the Currency Eugene A. Ludwig.
Although legislation is not expected to pass Congress this year, the House Banking subcommittee on financial institutions, which held Tuesday's hearing, is expected to vote on the bill next week.
If it passes, the measure will probably go before the full committee, and some industry lobbyists worry that a committee-passed bill is always a threat.
Safeguards Said in Place
Mr. Ludwig, who appeared before the panel along with the heads of the Office of Thrift Supervision and the Federal Deposit Insurance Corp., said regulators already have sufficient authority to deal with derivatives.
Most of the steps proposed in the bill have already been taken, he said.
They oppose legislation, he said, because they fear that inflexible statutory requirements could hurt their ability to adjust to a dynamic market.
Mr. Ludwig also said that while the OCC has no strong opposition to the current bill's content, the agency fears later revisions would be unacceptable.
Regulators also want to avoid driving derivatives trading activities offshore by increasing the cost of doing business in the United States, but Mr. Ludwig said, "the current piece of legislation doesn't cause that result."
If the derivatives market moves offshore, "it doesn't necessarily reduce the worldwide risk, it just moves it out of the U.S.," Mr. Ludwig said.
But several key members of the subcommittee said it is inappropriate for banks to use taxpayer-insured funds to trade for their own accounts in risky derivatives.
"If it is new and if it is risky, do it without insured dollars," said Rep. Charles E. Schumer, D-N.Y.
Mr. Ludwig said that was "a genuine issue for debate," and one for which "I don't have an answer."
Derivatives have exploded in popularity in recent years. They are financial contracts whose returns are derived from the performance of currencies, interest rates, or commodities. Banks held derivatives with notional amounts of $12 trillion as of Sept. 30, up from $9.7 trillion in September 1992, according to the FDIC.
Jonathan L. Fiechter, acting OTS director said, "Our primary concern is that derivatives not be used by thrifts for speculation."
He said that roughly 100 of the nation's 1,700 thrifts use derivatives, but are using them to reduce their overall risk by hedging.
Trade Group Opposition
Eight industry trade groups, including the Bankers Roundtable and the Securities Industry Association, joined regulartors in opposing the bill.
"We believe the bill's provisions will reduce the availability and increase the cost of important risk-management strategies involving derivatives," the organizations said in a written statement.
Later this month, the OCC plans to send banks an advisory letter cautioning them to be wary of the risks of structured notes. Most of those instruments are cobbled from government-issued notes, but have complicated embedded features that make them much riskier than the underlying notes.
In August, the agency expects to issue new guidelines on derivatives to its examiners.