Fed and SEC reach agreement to share bank information

WASHINGTON (Reuters) - The Federal Reserve and securities regulators on Monday formalized a deal to share information about banks, in a move expected to strengthen oversight of the financial markets rocked by the housing crisis.

Urgent regulatory changes have been in the works since the Fed helped rescue investment firm Bear Stearns in March and opened its discount window for emergency cash to other U.S. investment banks, which currently are supervised by the Securities and Exchange Commission.

The agreement was not designed to create new rules to oversee the investment banks, which traditionally have enjoyed less regulation than commercial banks and bank holding companies.

The memorandum of understanding between the Fed and the SEC outlines the scope and mechanism for sharing information related to the Fed's discount window and other areas.

"It formalizes and strengthens the ongoing cooperation between our two agencies to enhance the stability of the financial system," Fed Chairman Ben Bernanke said in a statement issued jointly with the SEC.

Emergency action by the Fed in March to stem a financial market panic over U.S. subprime mortgage losses marked the first time since the Great Depression that the U.S. central bank had risked taxpayers' money by allowing investment banks access to its lender-of-last resort liquidity facilities.

Since then, Fed officials have argued that they need more oversight of investment banks if they going to be obliged by circumstances to lend them money again in the future.

As a result, the memorandum is something of a stop-gap measure to tide authorities over until new regulations can be debated and passed by Congress.

This time-consuming process will almost certainly take lawmakers into next year and into a new White House administration following the November presidential elections.

The Treasury has issued a "blueprint" to modernize the country's financial rules and regulations but Democratic lawmakers, who currently have a majority in Congress, have made plain that they won't focus on this until 2009.

Treasury Secretary Henry Paulson said in a statement that the memorandum was consistent with the blueprint.

CONGRESS EXAMINES FINANCIAL REGULATION

House of Representatives Financial Services Committee Chairman Barney Frank is planning a series of hearings starting this week to examine the U.S. regulatory financial system. A spokesman for Frank said the release of the memorandum will not delay the committee's hearings.

Sen. Charles Schumer, chairman of the Joint Economic Committee, said the Fed-SEC agreement was a good step, but "does not substitute for the broad restructuring and reform that will be coming."

The chairman of the Senate Banking Committee, Christopher Dodd, and the committee's top Republican, Richard Shelby, have warned regulators not to get ahead of Congress with any Wall Street reforms. Dodd said his committee would be examining financial regulation in greater detail over the coming weeks.

"It is important to note that the MOU does not grant any new authority to either agency," Dodd said in a statement.

The Fed and SEC said they expect the memorandum to both improve the ability of the SEC to perform as primary supervisor of investment banks, and enhance the Fed's oversight of broader financial market stability.

The SEC, as the primary supervisor of the country's four largest investment banks -- Goldman Sachs (GS.N), Lehman Brothers LEH.N, Merrill Lynch MER.N and Morgan Stanley (MS.N) -- will provide the Fed with information and analysis about the firms' financial condition, risk management systems, internal controls and capital, liquidity and funding resources.

The Fed will share information about the financial markets, including its assessment of the conditions in markets that may affect the operations or financial condition of the banks.

The regulators also agreed to try and meet at least quarterly each year to identify, discuss and share information about the regulatory and supervisory issues related to the banks.

"This agreement will permit the expanded sharing of information on a confidential basis, and help ensure that regulated entities receive a coherent message from Uncle Sam," said SEC Chairman Christopher Cox.

The financial services industry welcomed the agreement.

"What financial institutions hate the most is uncertainty. This provides written specific procedures and expectations," said John Dearie, senior vice president for policy at the Financial Services Forum.

(Additional reporting by Karey Wutkowski; Editing by Leslie Adler)