WASHINGTON A broad crackdown on Wall Street is churning forward, even as regulators assured a Senate panel on Thursday they would seek more input on how to pick which financial institutions need stricter policing.
Members of a new inter-agency council on U.S. economic stability said they would extend their public comment period on how to choose important banks, insurers and hedge funds for heightened surveillance and tougher capital rules.
The concession by the Financial Stability Oversight Council came as a House of Representatives panel was expected to vote on Friday for weakening the consumer protection provisions of 2010's Dodd-Frank law and slowing down implementation of its new rules for derivatives markets.
The measures in the Republican-controlled House were not expected to advance in the Democratic-controlled Senate.
Still, for investors, the conflict on Capitol Hill over the issue translates into uncertainty, particularly for big bank and insurance stocks, as the 2012 elections approach. If Republicans next year win control of the Senate or the White House, Dodd-Frank could be in jeopardy, analysts said.
In the months ahead, "the real key is whether any Democrats push back against this tougher regulatory regime. The more Democratic pushback, the easier time Republicans will have in 2013 in rolling back parts of Dodd-Frank," said MF Global policy analyst Jaret Seiberg.
Few signs of erosion of Democratic support for Dodd-Frank were in evidence at the Senate Banking Committee hearing.
Democratic Senator Mark Warner urged the inter-agency risk group to explain as soon as possible its criteria for tagging some financial businesses as systemically important financial institutions, or SIFIs.
"We've got to give some more clarity here. The sooner the better," Warner said, adding regulators are causing unneeded stress by keeping firms in the dark.
Federal Reserve Chairman Ben Bernanke told the senators that the Fed would press ahead with a parallel effort to set stricter capital, leverage and credit limit standards for big financial firms -- measures he said will reduce the chance that these complex firms will fail.
"To meet the January 2012 implementation deadline for these enhanced standards, we anticipate putting out a package of proposed rules for comment this summer," he said.
Bank holding companies with assets of $50 billion or more are automatically included as SIFIs. Wall Street giants such as Goldman Sachs and JPMorgan Chase will likely be swept in. Major insurance companies, hedge funds and other non-bank firms are trying to avoid the SIFI tag.
Republican Senator Richard Shelby said markets are nervous about the SIFI rules. "Firms are unsure which types of activities will cause them to be subject to systemic risk regulation. The burden is on our regulators to demonstrate that they know exactly what they are doing before they begin to implement this new form of regulation," he said.
With an uneven economic recovery under way, and a massive federal deficit problem looming, financial regulation is being tightened in the United States, and at a faster pace than parallel efforts in the European Union.
U.S. agencies are steadily putting the sprawling Dodd-Frank legislation into practice, and analysts expect no major change in course, at least not for the next 18 months, despite resistance from Republicans and banking lobbyists.
BE TOUGH, BAIR URGES
Republicans see Dodd-Frank as a regulatory over-reach that will restrict credit and harm U.S. competitiveness. Democrats in turn defend the need to prevent the excessive risk-taking linked to the 2007-2009 financial crisis, setting the tone for a debate that will continue up to and beyond the 2012 presidential election.
Federal Deposit Insurance Corp Chairman Sheila Bair, who is stepping down in early July, told the Senate panel that regulators need to signal to the markets that unstable financial giants will not be bailed out, as they were in 2008.
She said the government must be tough on "living wills" that these financial firms must submit, and force them to change their organizational structures so they can be dismantled easily, if needed, in a financial crisis.
She said regulators should impose even higher capital charges on firms until their "living wills" are approved.
"Unless reversed, we could expect to see more concentration of market power in the hands of the largest institutions, more complexity in financial structures and relationships, more risk-taking at the expense of the public, and, in due time, another financial crisis," Bair said.
In the House, the Financial Services Committee was expected to vote on Friday to approve two bills: one to weaken a financial consumer watchdog body being set up under Dodd-Frank; another to delay new derivatives regulation. The Commodity Futures Trading Commission recently said it was reopening the comment period for most of the rules it has already proposed for as much as 30 days.
House Republicans are backing a bill to curb the power and independence of the new, Dodd-Frank-mandated Consumer Financial Protection Bureau (CFPB). It is set to open its doors in July to protect consumers from abusive mortgages and credit cards.
Like much of the Republican anti-Dodd-Frank agenda, the CFPB bill is expected to stall in the Democratic-controlled Senate, with President Barack Obama's veto pen a huge hurdle.
"Opponents of reform are just trying to cripple an agency they never supported in the first place," said Pamela Banks, senior policy counsel for Consumers Union, an advocacy group.
(Additional reporting by Sarah N. Lynch, Rachelle Younglai, Dave Clarke and Pedro da Costa. Writing by Kevin Drawbaugh; Editing by Tim Dobbyn)