U.S. systemic risk watchdog not panacea: regulators

WASHINGTON (Reuters) - Two top U.S. bank regulators offered competing views on the value of creating a so-called systemic risk regulator to oversee broad threats to the financial system, with one saying the move would be only of “incremental benefit.”

U.S. Federal Reserve Board Chairman Ben S. Bernanke (L), shakes hands with Federal Reserve Board Governor Daniel K. Tarullo, as his wife Louisa B. Tarullo looks on during the swearing-in ceremony in Washington, January 28, 2009. REUTERS/U.S. Federal Reserve Board/Handout

Federal Reserve Governor Daniel Tarullo said a systemic risk regulator should help cut the risk of big financial shocks, but Federal Deposit Insurance Corp Chairman Sheila Bair said regulators already had ample powers that they should employ more aggressively.

In congressional testimony obtained by Reuters on Thursday, Bair urged U.S. lawmakers to move with caution in crafting new rules to regulate banks, insurance firms, broker-dealers and other financial firms.

“We need to recognize that simply creating a new systemic risk regulator is a not a panacea,” Bair said in testimony prepared for delivery to the Senate Banking Committee. “The most important challenge is to find ways to impose greater market discipline on systemically important institutions.”

Tarullo, in testimony prepared for the same panel, agreed such a regulatory approach would not prove a cure-all, but he said the United States needed a “comprehensive strategy for containing systemic risk.”

And he said the Fed needed to play a role, even if it was not taking the lead.

“As the central bank of the United States, the Federal Reserve has a critical part to play in the government’s responses to financial crises.”

U.S. lawmakers are crafting rules to overhaul financial regulation and many want to empower a regulatory agency to look across a broad variety of institutions to identify potential risks to the entire financial system.

The Fed is widely seen as the leading candidate to be handed that power, but Senate Banking Committee Chairman Christopher Dodd has said the central bank might have too much on its plate and might possibly need to shed other responsibilities, such as consumer protection authority.

Bair said regulators, who already have many broad powers that were not used effectively, will try to do a better job. She said giving rule-making authority to all banking regulatory agencies also would help protect consumers from engaging in financial products that could be unfair and deceptive.

Tarullo said U.S. regulators need improved tools to allow for the orderly resolution of systemically important non-bank financial firms that fail and say the Federal Deposit Insurance Corp model is a good place to start.

“Any new resolution regime would need to be carefully crafted,” Tarullo said.

At the hearing the heads of the U.S. Office of the Comptroller of the Currency, which regulates some of the largest U.S. banks, and the Office of Thrift Supervision also are expected to testify.

Additional reporting by Tim Ahmann; Editing by Jan Dahinten