Federal Reserve should not be given absolute power over financial system

A day after the administration sent Congress legislation that would make the Fed the supercop of the U.S. financial system, as well as create the new oversight council to boost coordination among regulators and raise capital requirements for financial institutions, Securities and Exchange Commission Chairman Mary Schapiro and Sheila Bair, head of the Federal Deposit Insurance Corp., appeared before the Senate Banking Committee, stressing that crucial role should not be given to one agency. Instead it should be played by the new stability oversight council. The body would include the Treasury Department, the Fed, and the two independent agencies headed by Bair and Schapiro.

Meantime, in the House Republicans introduced an alternative. Under the statutes of their bill bankruptcy would become an easier option for winding down larger financial institutions that are not banks. It also would create a single regulator for all banks, stripping the Fed of its supervisory role and abolishing two Treasury Department agencies, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

According to Bair an interagency council with strong and extensive authorities "will provide for an appropriate system of checks and balances." A council "with real teeth ... would be highly effective," Bair said. It would be "tremendous" power to invest in a sole regulator, she said. As for Schapiro, she said that the new council "must be strengthened well beyond" what is envisaged in the administration's plan.

Paul Stevens, president and CEO of the investment Company Institute, the mutual fund industry's biggest trade group, urged Congress to "create a strong systemic risk council." Putting the bulk of systemic risk authority in the Fed "strikes the wrong balance" and would mark "worrisome expansion of the Federal Reserve's authority over the nation's entire financial system," he said in testimony following the two regulators. 

Sen. Richard Shelby of Alabama, the committee's senior Republican, said expanding the Fed's powers as called for in the administration's plan "could be very dangerous" and "inconsistent with the principles of democratic government." 

A number of lawmakers of both parties insist that the Fed failed to prevent the economic crisis and shouldn't be entrusted with more responsibility but should stay focused on its primary duty of setting monetary policy. 

Source: Reuters