WASHINGTON The Federal Reserve's spotty record on bank oversight and consumer protection on Thursday prompted skepticism among lawmakers at a hearing on the Obama administration's sweeping plan to reshape U.S. financial regulation.
As regulators testified on the Obama plan at a Senate Banking Committee hearing, lawmakers questioned the administration's core proposal to give the Fed an important new job -- policing systemic risk in the overall economy.
"We need someone looking at the whole economy for the next big problem, with the authority to do something about it," said Senate Banking Committee Chairman Christopher Dodd.
"I share my colleagues' concerns about giving the Fed additional authority to regulate systemic risk. The Fed hasn't done a perfect job, to put it mildly, with the responsibilities it already has," Dodd said.
He added that he was still "agnostic" on how systemic risk oversight should be structured, but that he was leaning toward the idea of centering it in an inter-agency council.
Skepticism about the Fed's past and the future envisioned for it as the super-regulator has dogged the Obama plan for months, but the administration has not deviated from its proposal.
THE FED ON CENTER STAGE
On Wednesday, the White House sent draft legislative language to Congress on systemic risk regulation that placed the Fed in a central role, while also calling for establishment of a council of regulators that would work with the Fed.
Senator Richard Shelby, the banking committee's top Republican, accused the Fed of backing flawed global capital standards, failing to police large banks and acting too late on mortgage underwriting guidelines to protect consumers.
"The Federal Reserve is already overburdened with its responsibility for monetary policy, the payment system, consumer protection and bank supervision. I believe anointing the Fed as the systemic risk regulator will make what has proven to be a bad bank regulator even worse," Shelby said.
But a senior Fed official defended the Obama proposal. Systemic risk oversight would be a natural extension of the Fed's existing jobs, Fed Governor Daniel Tarullo said.
"There are some important synergies between systemic risk regulation and monetary policy," he told the committee.
AVOIDING ANOTHER CRISIS
Systemic risk regulation is a key part of President Barack Obama's program for tightening oversight of banks and capital markets following the deepest financial crisis in generations.
The main idea is to prevent a recurrence of last year's situation, in which the financial system lurched to the brink of collapse for reasons -- a burst mortgage bubble, toxic debts, predatory lending, unregulated derivatives -- that no single government agency could fully foresee or prevent.
The confused jumble of Bush administration bailouts that followed, at a stunning cost to taxpayers, landed in Obama's lap when he took office. Six months of intense debate over a regulatory response is now largely shifting to Capitol Hill.
By the end of July, the administration will have transmitted more than a half-dozen pieces of financial regulation reform legislation to Congress.
Obama wants to sign reforms into law before the end of the year. But delays are arising in Congress, a potentially lethal danger for the president's agenda, which analysts said could lose momentum as the economy bounces back and banks stabilize.
The Senate committee hearing took place as the government reported U.S. existing home sales notched their third monthly rise in June, while the stock market rallied, with the 30-stock Dow Jones industrial average up 2.2 percent at 9,079.04.
Federal Deposit Insurance Corp. Chairman Sheila Bair told the committee the systemic risk council, which would work with the Fed, should be headed by a presidential appointee, not the secretary of the Treasury, as the administration proposes.
Federal Reserve Chairman Ben Bernanke will testify on financial regulation reform on Friday before the U.S. House of Representatives Financial Services Committee, along with Treasury Secretary Timothy Geithner and the FDIC's Bair.
(Additional reporting by Karey Wutkowski, Mark Felsenthal, Rachelle Younglai and Alister Bull; Editing by Jan Paschal)