Fed Seeks Greater Financial Regulatory Powers

Ed Kountz | July 10, 2008, 09:11 AM

In what’s become a regular chorus in recent weeks, Fed Reserve Chairman Ben Bernanke has suggested a formal receivership process for investment banks, and has posed the Fed as the logical choice to regulate systemic risk in the industry. The move, coming on the heels of similar calls from Treasury Secretary Henry Paulson and FDIC chair Sheila Bair, is significant because it would, if enacted, give the Fed and the SEC greater authority over the workings of the capital markets and additional regulatory powers. Aside from the eventual impact of such changes,it's already clear that such moves would introduce significant regulatory change into the space--without, at least at present, a clear path to how that change would be managed or function.

Expect a reiteration of these points later Thursday, when Bernanke and Treasury Secretary Paulson are slated to give testimony on investment bank oversight to the House Financial Services Committee. Bernanke noted that “Fed/ SEC cooperation is taking place within the existing statutory framework, with the objective of addressing the near-term situation. In the longer term, legislation may be needed to provide a more robust framework for the prodential supervision of investment banks and other large securities dealers.” The SEC and the Fed have already worked out a memorandum of understanding (MOU), in which the two agreed to share information and analyses regarding the financial strength of primary dealers, and to “work jointly with the firms to support their continued efforts to strengthen their balance sheets, their liquidity, and their risk-management practices,” according to the transcript of Bernanke’s speech.

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Yet while Bernanke’s calls come on the heels of similar ones by both Paulson and Bair, several issues remain unresolved.
First is clarity around how such a process would work, and what roles would go to what players. In addition, not all relevant agencies have bought into all elements of the concept—the Office of Thrift Supervision, for example, has said that it does not believe it necessary for Congress to legislate a framework for investment bank receivership. And beyond the day-to-day issues facing the Fed within the credit crisis, it’s unclear how the Fed expects a receivership process for investment dealers would work, or what should happen if a firm is deemed to be on the brink.

But perhaps most importantly, beyond the cost and other burdens that a process would entail, time is elapsing in the current legislative session, making it likely that any real action would not come until the start of the next session in 2009. Still, given the number of times the issues’ been raised, expect the issue to received renewed attention once a new Congress and administration are in place.