WASHINGTON — The Federal Deposit Insurance Corp. emerged as the leading candidate to assume resolution powers over systemically important institutions after a Senate Banking Committee hearing Thursday on regulatory reform.
Senate Banking Chairman Christopher Dodd opened the hearing by arguing that the power to unwind a systemically important institution should not necessarily be given to a proposed systemic risk regulator. "I wonder whether it wouldn't make more sense to give the authority to resolve failing systemically important institutions to the agency with actual expertise in that area: the FDIC," the Connecticut Democrat said.
The idea was broadly backed by FDIC Chairman Sheila Bair and Gov. Dan Tarullo of the Federal Reserve Board, both of whom testified that resolution powers should be kept separate from systemic oversight.
"The new resolution authority should be independent of the new systemic risk regulator," said Bair, who indicated a willingness to accept new powers but did not lobby for them. "No single government entity should be able to unilaterally trigger a resolution strategy outside the defined parameters of the established resolution process."
Tarullo agreed but said a risk regulator — which is likely to be the Fed — should at least be given a consultative role.
"Resolution mechanisms … shouldn't be included within the systemic risk regulator," he said. "I think you should have the systemic risk regulator have a role in determining where the resolution is used."
Currently the FDIC has authority to unwind banks and thrifts, but it cannot put bank holding companies or major nonbank financial firms, such as insurance companies or investment banks, into receivership. Bair said that the government's ad hoc response to the crisis to date was a direct result of the absence of such powers, and that the collapses of American International Group Inc. and Lehman Brothers could have been handled differently.
Bair said the government should have the power to create a bridge bank or put such companies into conservatorship and receivership, as well as to establish a clear priority list of how to handle creditors and debtholders.
When asked how difficult it would be to extend such powers, Bair said it would be relatively "simple" to grant the FDIC authority to resolve bank holding companies. Going beyond that to include insurance and other firms would be more difficult, she said, though she did not object to being granted such power.
Dodd said it was clear the issue had momentum.
"It seemed to me there was almost unanimous thinking this morning on the issue of having some sort of resolution vehicle that is large enough to deal with entities like AIG when they occur, that you don't end up just pumping capital to places and that's your only answer," Dodd told reporters after the hearing.
The discussion was held only a day after President Obama said he wants to "fast track" legislation to give the government resolution powers over large firms such as AIG. He did not specify which agency would assume such powers.
The Senate hearing threw that conclusion into doubt, as Dodd seemed adamant that the Fed not be given too much control.
"From its failures to protect consumers to regulate mortgage lending, the issues at which the Fed has failed" are numerous, Dodd said.
Frank has endorsed making the central bank the systemic risk regulator, but Dodd continued to express doubts. He was seconded by Sen. Richard Shelby of Alabama, the committee's ranking Republican, who appeared open to handing risk oversight to the FDIC. "I'm not enamored with some of the Fed's actions. … Some of the biggest failures in the world occurred under their watch," Shelby said. "We are looking at everything as we try to establish this record. A lot of people have a high regard for the FDIC, and so do I. We are a long ways from deciding."
Dodd also tipped his hand on larger plans for regulatory reform, seeming to embrace the idea of combining the myriad regulators overseeing the financial services industry into a consolidated supervisor.
"The problem is the picture in the room," he said, gesturing to a packed witness table that included regulators from the four banking and thrift agencies, the credit union regulator and state supervisors. "It's become so large and bureaucratic and confusing to people."
But Dodd also said he did not want to embrace the U.K. model, with the Financial Services Authority overseeing everything.
"That also could be inherently dangerous in many ways, so I'm not suggesting that large numbers are wrong, but they certainly do pose serious complications as to who's in charge when you get these gaps," he said.
During the hearing, Dodd pressed regulators on the need to retain all four banking agencies.
"Does this make any sense at all?" he asked. "Do we have too many regulators?"
Regulators acknowledged that some consolidation would be more efficient.
"You probably could have fewer bank regulators," Bair said.
Comptroller of the Currency John Dugan said "there are too many" agencies.
But both also defended aspects of the current system. Bair touted the value of the dual banking system. "You still have to preserve the state charter," she said.