An Obama administration proposal to give the Federal Reserve authority to regulate companies the agency believes pose systemic risk to the financial system would “strike the wrong balance,” Paul Schott Stevens, president and CEO of the mutual fund industry's Investment Company Institute, said today at a hearing before the Senate Banking Committee.
“Unfortunately, the administration's proposal would vest the lion's share of authority and responsibility for systemic risk regulation with the Federal Reserve, relegating the (newly proposed Financial Services) Oversight Council to at most an advisory or consultative role,” Mr. Stevens said in the text of testimony at the hearing.
Mr. Stevens said he would give the authority to regulate systemic risk to a council composed of members from key federal agencies that already oversee various aspects of the financial industry.
“By expanding the mandate of the Federal Reserve well beyond its traditional bounds, the administration's approach could jeopardize the Federal Reserve's ability to conduct monetary policy with the requisite degree of independence,” Mr. Stevens said.
“The shortcomings that we see with the administration's plan reinforce our conclusion that a properly structured statutory council would be the most effective mechanism to orchestrate and oversee the federal government's efforts to monitor for potential systemic risks and mitigate the effect of such risks.”
On Wednesday, the Department of Treasury unveiled the Obama administration's legislative proposal for regulating systemic risk that would dramatically enhance the ability of federal agencies to oversee financial firms large enough to present systemic risk to the financial system.
The legislation would create the Financial Services Oversight Council to identify emerging risks. The council would be chaired by the treasury secretary and its seven additional members would be the heads of the Federal Reserve, the SEC, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corp.; the Federal Housing Finance Agency; the proposed National Bank Supervisor; and the proposed Consumer Financial Protection Agency, according to a department news release.
Under the legislation, all financial firms determined to pose a threat to financial stability, based on their size, leverage and connections to the financial system, would be designated as Tier 1 financial holding companies and subject to regulation by the Fed. Tier 1 companies would be subject to higher capital, liquidity and risk management standards than other bank holding companies, the release said.
All financial holding companies, including Tier 1 firms, also would be subject to higher minimum capital requirements than current regulations mandate, according to the release.
In addition, the legislation would require bank regulators and the SEC to issue rules that would require the “securitizer of an asset-backed security to retain 5% of the credit risk of the underlying assets,” the release said.