U.S. regulators, banks look to quiet new watchdog

WASHINGTON (Reuters) - The new U.S. watchdog envisioned to protect consumers from risky financial products and services could lose some of its bite as industry and existing regulators unite against its sweeping powers.

The Consumer Financial Protection Agency, proposed by President Barack Obama on Wednesday as part of a financial regulation overhaul, could compromise banks' safety and soundness and raise prices for consumers, these critics argue.

The new agency, that Congress would have to authorize, could write rules, design or ban financial products, examine firms, and impose fines and other penalties on practically any institution that offers products such as home loans or credit cards.

"The danger here is you create this Consumer Financial Protection Agency to do a good thing, but you've created this unwieldy and unaccountable structure," said Kevin Petrasic, an attorney with law firm Paul Hastings and a former counsel at the Office of Thrift Supervision.

Petrasic said it could cause regulatory costs to soar, which will be passed along to the consumer, and could stifle innovation, limiting consumers' options for financial products and services.

The agency is a key part of Obama's regulatory plan and is aimed at helping prevent a repeat of the subprime mortgage debacle, at the root of the current credit crisis, in which people obtained home loans they ultimately could not afford.

Bank regulators fear that separating the oversight of an institution from the oversight of its products and services could throw a wrench in their ability to ensure that banks conduct their business in a safe and sound way.

For example, the new agency might limit risk-based pricing for credit cards, which some regulators believe helps banks manage their businesses effectively.

"It could be a disaster," said one regulatory source who declined to be identified, as regulators are still discussing alternative proposals.

The source said banks could end up being pushed one way by the Consumer Financial Protection Agency and another way by their primary regulators.

The regulators' concerns are backed by a chorus of voices from the financial industry, who do not want extra regulation.

"It's going to create exactly the type of duplication, second-guessing and layering that we feared," said David Hirschmann, president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness.

POTENTIAL COMPROMISE

To be sure, regulators' complaints to lawmakers may be a hard sell. The consumer protection responsibilities of the Federal Reserve and the other primary bank regulators have often taken a backseat to their other oversight roles.

New regulations on mortgage products and credit cards took years to come to fruition, and only made it into writing when the seeds of the financial crisis had already been sown.

"The Fed, which was basically doing these types of regulations, did not do a very good job," Senator Charles Schumer, a New York Democrat, told reporters on Tuesday, adding the new agency makes "eminent sense."

Peter Morici, an economics professor at the University of Maryland said the last thing the banks need is another dimension of regulation. "We do need for the agencies like the Fed and (Federal Trade Commission) to do their jobs better and that is already happening," Morici said.

Past perceived lapses mean lawmakers may not respond to the middle ground that business groups and regulators had hoped for: simply beefing up the consumer protection roles that already exist inside the agencies.

And lawmakers see consumer protection as a way to let voters know that the regulatory overhaul is looking out for them.

That political dimension helps ensure bipartisan support for some form of beefed up consumer protection in the financial products arena.

"There need to be consumer protections, I agree with that," Senator Bob Corker, a Republican member of the Senate Banking Committee, told Reuters. "Whether you need a new agency or whether you want to embed it more strongly in the various agencies will be subject to debate."

(Reporting by Karey Wutkowski with additional reporting by Susan Cornwell and Jeremy Pelofsky; Editing by Tim Dobbyn)