16 June 2009

A new role as 'risk regulator' could reshape U.S. Fed

The following is excerpted from the 16 June 2009 edition of “globeandmail.com”.

The Obama administration's plan to revamp regulation and prevent any more crashes like those that felled AIG and Lehman Brothers includes a bold new idea: Empower the U.S. Federal Reserve to oversee the biggest financial players whose failure could threaten other institutions and the economy.

But some lawmakers and economists say making the Fed a “systemic risk regulator” would itself be a high-stakes risk that would distract from its core mission: reviving the economy.

They say the Fed shares blame for the financial crisis that erupted last fall.

Along with other regulators, it failed to crack down on risky mortgages and lax lending standards that ignited the crisis….

Treasury Secretary Timothy Geithner and Lawrence Summers, head of the White House's National Economic Council, said in an opinion piece published Monday in The Washington Post that the Fed would become a “systemic risk regulator” for “large, interconnected firms whose failure could threaten the stability of the system.”…

President Barack Obama plans to unveil the regulatory plan Wednesday, with congressional hearings the next day.

Even inside the Fed, there's recognition that its examiners would need to improve their ability to detect risks if it was to be made a new financial supercop….

Expanding the powers of the Fed, whose members aren't elected, would also raise concerns about accountability. Though the Fed has sought to be more open, it remains one of Washington's most secretive institutions….It's unclear whether the Fed would have to hire additional banking examiners or other specialists to carry out its supercop duties. And it's not known how much other agencies would share information about companies or products.

Partly out of fear of concentrating too much policing power in the Fed, others have pushed for a a council of regulators that would work with the Fed to supervise “too-big-to-fail companies.” …