WASHINGTON — The Treasury Department on Monday is set to recommend adding broad powers to the Federal Reserve Board, merging the national bank and federal thrift charters, and eliminating the federal credit union charter.
In its long-awaited restructuring blueprint, Treasury calls for short, medium and long term steps that it believes should be taken to modernize the financial regulation.
Its long-term recommendations include reducing the current patchwork of federal regulators down to three: the Fed, which would act as a systemic risk regulator, including oversight of all financial holding companies; a prudential safety and soundness regulator to supervise a single federal insured institutions charter; and a business conduct regulator, which would monitor conduct, including consumer protection, across all financial firms.
Treasury announced its plans to recommend a new regulatory structure last year and although it said it was not spurred by the current credit crunch, the crisis has highlighted holes in the regulatory structure.
"Recent market developments have pressured this regulatory structure, revealing regulatory gaps and redundancies," said a summary of the Treasury report first obtained by The New York Times. "These regulatory inefficiencies may serve to detract from U.S. capital markets competitiveness
Though it called for the merger of all federal financial institution charters in the long term, Treasury recommended more immediate action with regard to thrifts and their regulator, the Office of Thrift Supervision. Treasury said the thrift charter "is no longer necessary to ensure sufficient residential mortgage loans are made available to U.S. consumers" and should be merged with the national bank charter within two years. The OTS' duties, Treasury said, should be assumed by the Office of the Comptroller of the Currency.
In a press release issued after leaks of the Treasury plan were made public, OTS Director John Reich defended his agency's existence, and said it should be expanded, not curtailed.
"We also believe there is a strong case to be made that, because of the long-time OTS expertise in the home mortgage market ... OTS authority should be expanded to provide nationwide uniformity in the regulation of mortgage bankers and mortgage brokers," he said.
In an e-mail sent to staffers on Friday, Mr. Reich went further, noting that previous administration efforts to revamp regulatory structure have failed.
"When the Treasury Department issues its recommendations, expect to see news stories and renewed questions about what the future will hold," Mr. Reich said in the e-mail. "Take note of the fanfare, then look back to the Truman Commission in 1947 and others like it in the years since — and resume the important work that you continue to do so well, each and every day. Remember, the 20th anniversary of the OTS is next year. We can all expect — despite predictions over the years to the contrary — to be celebrating it."
Treasury also said that federal supervision of state-chartered banks should be overseen by one regulator — either the Fed or the Federal Deposit Insurance Corp. — but said it would commission a study on which agency would be more appropriate. Currently, the FDIC conducts federal supervision of non-member state banks, while the Fed oversees member state banks.
Additionally, Treasury recommended the merger of the Securities and Exchange Commission and the Commodities Futures Trading Commission within a short time frame.
But it was its long term recommendations that were liable to generate the most controversy. Treasury called for the creation of a single federal financial institutions charter, effectively merging the federal bank, thrift and credit union charters. Treasury said the new charter should enjoy preemption powers, and be based on the national bank charter.
"The goal of establishing a [federal insured depository institution] charter is to create a level playing field among all types of depository institutions where competition can take place on an economic basis rather than on the basis of regulatory differences," a summary of the Treasury blueprint said.
To oversee the charter, Treasury called for the creation of the Prudential Financial Regulatory Agency for financial institutions. PFRA would assume the roles of current federal prudential regulators, including the OCC, OTS, and National Credit Union Administration.
Though a recommendation to merge the bank and thrift charters was expected, Treasury is handling a potential hot potato with regard to its recommendation to also merge away the federal credit union charter. The politically powerful credit union lobby is likely to fight tooth and nail against any attempt to eliminate the federal credit union charter.
The blueprint also called for broad expansion of the authority of the Fed. The Fed would serve as a market stability regulator, Treasury said. To perform this function, it said the central bank "should have the responsibility and authority to gather appropriate information, disclose information, collaborate with the other regulators on rule writing, and take corrective actions when necessary in the interest of overall financial market stability."
The Fed would be able to mandate information reporting requirements for federal financial services providers and for federally chartered holding companies.
Treasury also wants the Fed to have authority to require corrective actions to address risks or to constrain future risk-taking. But Treasury said this authority should be limited to instances where overall financial market stability was threatened.
The report also addressed access to the Fed's discount window. The Fed recently took the unusual step of opening its discount window lending to investment banks. On Wednesday, Treasury Secretary Henry Paulson said if such access becomes regular then the Fed should have oversight of such institutions. On Thursday, presidential candidate Sen. Barack Obama went a step further saying at a minimum, Fed oversight should include liquidity and capital requirements.
In the blueprint, Treasury recommended that discount window lending be accompanied by the Fed's authority to collect information from and conduct examinations of borrowing firms in order to protect the Fed and the taxpayer. This would in effect open Wall Street up to Fed oversight with any participation in the discount window.
Treasury's recommendation echoed one from House Financial Services Committee Chairman Barney Frank, who said March 20 that policymakers should create a systemic risk regulator, or empower the Fed to serve in that capacity.
Treasury also recommended the creation of a third regulator, the Business Regulatory Agency, which would oversee business conduct of all the companies.
"Business conduct regulation in this context includes key aspects of consumer protection such as disclosures, business practices, and chartering and licensing of certain types of financial firms," Treasury said. "One agency responsible for all financial products should bring greater consistency to areas of business conduct regulation where overlapping requirements currently exist."
Treasury also suggested changes to the FDIC. It said it should be redesignated as the Federal Insurance Guarantee Corporation and have the ability to set risk-based premiums, charge assessments, act as a receiver of failed institutions, and maintain some back-up examination authority over those institutions. But Treasury said the new FIGC should not possess any additional direct regulatory authority, effectively stripping the FDIC of its direct oversight of banks.
