Bair Criticizes New Regulatory Plan

Earlier, I finished analyzing the House's new plan to control systemic risk (.pdf). In doing so, I explained a few observations and worries. I didn't like how it assesses fees on healthy firms to pay for the resolution of those that fail. I also thought it gives a lot of power to the Treasury Secretary. Furthermore, I wondered why the Oversight Council seems to get so little responsibility. Apparently, I'm not the only one with these criticisms. Federal Deposit Insurance Corporation Chairwoman Sheila Bair agrees. You can find Bair's prepared testimony before the House Financial Services Committee about this proposal here. The New York Times explains her criticism about the Council:

In particular, she said the new council should be headed not by the Treasury secretary -- as the administration has proposed -- but by an independent chairman. She said that the new council should be given greater authority to write rules that would serve as a floor, rather than a ceiling, for other financial agencies. While creating a new agency with broad new powers, the White House plan continues to give significant authority to the Federal Reserve to supervise the largest financial institutions.

I agree with all of that. An independent chairman certainly couldn't hurt. The Council's leadership would at least then be a little further insolated from political pressures. Here's what she says about the resolution fund:

"A prefunded Financial Company Resolution Fund has significant advantages over an ex-post funded system," Ms. Bair said in prepared testimony. "It allows all large firms to pay risk-based assessments into the Financial Company Resolution Fund, not just the survivors after any resolution, and it avoids the pro-cyclical nature of requiring repayment after a systemic crisis."

Again, I agree completely. Her criticism is a little different from mine, but just as strong. As you might guess, the Federal Reserve governor testifying, Daniel Tarullo, supported the measure. The Fed gets the most power through the proposal, so this is to be expected. Of course, the draft I wrote so much about is far from final. It could probably get through the House, and the White House likes it. But the Senate is a different story. It's the major obstacle these days for most legislation. So look for it to make some significant changes.

This article available online at:

http://www.theatlantic.com/business/archive/2009/10/bair-criticizes-new-regulatory-plan/29333/