Despite the previously voiced objections of Federal Reserve Chairman Ben Bernanke, the Senate Banking Committee voted 13-10 to send to the full Senate the latest financial regulatory reform proposal drafted by Sen. Christopher Dodd, D-Conn. The bill passed March 22 along strictly partisan lines, with 13 Democrats and 10 Republicans on the committee.
As The Washington Post reported, Republicans have objections to Dodd’s proposal but could not come up with a consensus among themselves on some issues. Sen. Richard C. Shelby,R-Ala., the ranking Republican on the committee, decided to forgo action on the proposed amendments. He plans to negotiate with Dodd behind closed doors.
The introduction of Dodd’s proposal on the Senate floor will come after Dodd and Shelby work privately to further efforts to create a bi-partisan reform bill. There also will be questions over how to rectify the Senate and House of Representative versions of each body’s respective reform legislation.
Bernanke had previously voiced concern that the legislation’s move to make the Fed the overseer of only the nation’s largest banks saddled the central bank with responsibility it doesn’t want.
“We are quite concerned by proposals to make the Fed a regulator only of the biggest banks,” Bernanke told the House Financial Services Committee on March 17. “It makes us essentially the too-big-to-fail regulator. We don’t want that responsibility.”
According to a March 17 Bloomberg News story, Bernanke and regional Fed bank presidents are opposing efforts by Congress to remove much of the central bank’s supervisory role, saying such authority complements monetary policy. Bernanke had already sent senators an 11-page paper in January arguing that the Fed should retain its powers.
Under Dodd’s proposed legislation , the Fed would see its supervisory authority limited to bank holding companies with more than $50 billion in assets while the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency would regulate smaller banks. According to Bloomberg, Dodd’s proposed bill is part of the most sweeping overhaul of financial regulation since the 1930s and is intended to prevent a repeat of the crisis that prompted taxpayer-funded bailouts of firms such as AIG and Citigroup.
But despite Dodd’s proposal and criticism of how the Fed has handled its supervisory role to date, Bernanke believes his agency’s participation in the oversight of banks of all sizes significantly improves its ability to carry out its functions.
“We want to have a connection to Main Street as well as to Wall Street,” Bernanke said in his prepared testimony before lawmakers. “We need to have insights into what is happening in the entire banking system.”
The Fed currently oversees about 5,000 bank holding companies and about 850 state member banks. The Board of Governors in Washington delegates supervisory authority to the 12 regional Fed banks. Under Dodd’s proposal, the Fed’s supervisory role would be cut to about 35 of the biggest financial institutions.
President Obama is a staunch supporter of Dodd’s plan to overhaul the financial regulatory system. As Reuters reported March 20, the President used his weekly radio address to urge senators to resist pressure to weaken the reform bill.
"I urge those in the Senate who support these reforms to remain strong, to resist the pressure from those who would preserve the status quo, to stand up for their constituents and our country," Obama said in his weekly radio address.
The President especially wants to see the creation of a powerful consumer protection agency.
"I won't accept any attempts to undermine the independence of this agency," President Obama said. “And I won't accept efforts to create loopholes for the most egregious abusers of consumers, from payday lenders to auto finance companies to credit card companies."
In December, the House passed a regulatory reform bill otherwise similar to Dodd’s that left the Fed’s current supervisory authority intact.