Fed as Risk Regulator?
WSJ.COM
Law professors told a Senate panel Wednesday that the Federal Reserve Board should be the primary regulator of systemic risk — a move that could drastically expand the Fed's jurisdiction beyond the banking system.
In testimony before the Senate Homeland Security and Governmental Affairs Committee, Harvard Law Professor Howell E. Jackson advocated expanding the Fed's powers to monitor risk in areas that until now were largely unregulated, such as hedge funds, insurance companies and over-the-counter derivatives.
"Rather than having to depend on cramped jurisdictional provisions drafted decades ago, the [Fed] Board should be given an open-ended mandate to monitor the entire financial services industry to identify and help rectify sources of systemic risk before the risks manifest themselves into real losses," said Jackson in prepared testimony.
"The [Fed] Board needs to develop its expertise in financial areas, such as insurance companies and derivative markets, where it has traditionally lacked authority and deferred to the oversight of others."
Another professor from the University of Connecticut Law School, Steven M. Davidoff, concurred that the Fed should be the systemic risk regulator and the lender of last resort.
He made a point, however, of suggesting that the Fed should not be directly in charge of bank capital regulation. Instead, he said, bank capital regulation should be placed in the hands of an independent agency that is subject to Fed input.
"I recommend this separation due to the Fed's special status and independence from Congressional oversight and need for particular Congressional supervision of capital requirements," Davidoff said in prepared remarks. The hearing Wednesday served to examine the results of a recent report issued by the U.S. Government Accountability Office. The report found that holes in the nation's outdated and fragmented regulatory structure must be plugged in order to avert another financial crisis.
Gene L. Dodaro, the Acting Comptroller General of the U.S., presented the findings to the committee and laid out a general framework for how to modernize the system.
The report found that regulators have "struggled, and often failed to mitigate the systemic risks posed by large and interconnected financial conglomerates." Many of these new risks have arisen in largely unregulated areas such as credit derivatives, credit rating agencies, non-bank mortgage lenders and hedge funds. The report calls on Congress to find a way to address these gaping holes in a way that will not hamper innovation or economic growth.
"The collective activities of a number of entities- including mortgage brokers, real estate professionals, lenders, borrowers, securities underwriters, investors, rating agencies and others -likely contributed to the recent market crisis, but no one regulator had the necessary scope of oversight to identify the risks to the broader financial system," the report says.
The report outlines suggestions based on input from 29 different agencies, trade organizations and other groups. It stops short, however, of endorsing any specific courses of action. –Sarah N. Lynch |
