Fed May Gain More Financial Oversight

Congress is moving to create strong new oversight of the financial sector that would likely give the Federal Reserve authority to examine the workings of a wide range of companies in an attempt to address one of the key failures that led to the financial crisis. 

But the initiative, which could be finalized in the House by spring, is raising concerns about whether it would muddy the Fed's traditional mission and concentrate too much power in a single federal body. 

The legislation envisioned by House Financial Services Committee Chairman Barney Frank (D-Mass.) would put the Fed, or less likely another government agency, in charge of protecting the stability of the entire system, Frank and other congressional sources said. 

An abundance of federal agencies regulate the financial industry.  But no agency is responsible for understanding or containing risks affecting the financial system as a whole.  In fact, none even has a complete picture of the financial markets. 

The danger was highlighted by last year's meltdown of insurance giant American International Group.  In the days before the government was forced to bail out the firm, no federal official comprehended the magnitude of the threat the company's troubles posed to the economy. 

Under Frank's legislation, the new regulator would likely be given the power to gather information about the inner workings of banks, investment firms, insurance companies, hedge funds and any other entity big enough or so intertwined with other companies that it creates the risk of a systemic collapse.  These companies would have to provide detailed information about how they manage risk, their derivative contracts and the extent to which they use borrowed money. 

"We need to give some regulator the power to restrain risk-taking that is excessive," Frank said.  He said he intends to move quickly, explaining that the Obama administration is eager to be able to show the Group of 20 finance ministers progress on financial regulation at a meeting in early April. 

President Obama, during his campaign, spoke approvingly of overhauling financial oversight.  Though he has not specifically endorsed the idea of making the Fed a financial system regulator, his administration has sent clear signals to Congress that they should proceed on that path.  The idea was first widely discussed last spring as part of a blueprint for regulatory reform issued by then-Treasury Secretary Henry M. Paulson Jr.

"Someone needs to have all of the information," said Scott Talbott of the Financial Services Roundtable, an industry group that represents 100 of the largest financial companies and that supports the plan. 

Many elected officials, financial experts, industry groups and consumer advocates agree there is a need for a "systemic risk" regulator that would watch for threats to the health of the financial system and that there is no clear alternative to empowering the Fed.  But there is also widespread concern that the new responsibility could stretch the agency too thin and conflict with the Fed's basic responsibility for managing the nation's money supply. 

The Fed was created by Congress nearly a century ago as an independent entity, insulated from political pressure, so it could take the unpopular step of slowing the economy to combat inflation.  But as a regulator, the Fed operates more like an ordinary government agency, with extensive review and oversight by congressional authorities. 

Government and private-sector officials worry that by taking on more regulatory responsibilities, the Fed could expose itself to more second-guessing by political officials.