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Regulators testify on financial services oversight
WASHINGTON (10/30/09)--In testimony delivered before a House Financial Services hearing on Systemic Regulation, Prudential Matters, Resolution Authority and Securitization, U.S. Treasury Secretary Timothy Geithner plainly stated that “the current rules in place for our financial system are inadequate and outdated.” The draft legislation would bring the current regulatory framework “into the 21st century, granting the government carefully constrained power to contain damage to the economy while managing the failure of large, complex financial institutions,” Geithner said, adding that it “represents a comprehensive, coordinated answer to the moral hazard problem posed by our largest, most interconnected financial institutions.” In a statement, Rep. Barney Frank (D-Mass.) said that his draft legislation would seek to “establish federal ‘resolution authority’ which would make it possible to wind down very large, failing firms without using taxpayer funds.” “We are going to reform securitization with some risk retention,” Frank said, adding that the draft legislation would also restrict “irresponsible subprime loans,” would regulate derivatives, and would end the existence of unreported, unregistered large enterprises. In her own prepared testimony, Federal Deposit Insurance Corporation Chairman Sheila Bair cited the need for improved resolution authority, improved supervision and regulation, and a comprehensive financial services oversight council to help “impose greater market discipline on systemically important institutions.” Any new regulatory structure should address “the industry’s excessive leverage, inadequate capital and over-reliance on short-term funding,” Bair said, adding that the structure should also “ensure real corporate separateness” and prevent banks from participating in “risky activities” such as “proprietary and hedge fund trading.” Additionally, the costs of winding down “large, systemically important firms” should not be borne by taxpayers, according to Bair. Rather, she said, “losses should be borne by the stockholders and bondholders of the holding company, and senior management” of failing firms should be replaced. In her testimony, Bair called for the establishment of a Financial Company Resolution Fund “that is pre-funded by levies” on financial firms with at least $10 billion in assets. Federal Reserve Board Governor Daniel Tarullo emphasized the importance of moving forward with the “administrative and legislative reform agenda” discussed during Thursday’s testimony, saying that the reforms, “taken together, will enhance financial stability” and “reduce both the probability and severity of future crises.” However, Rep. Scott Garrett (R-NJ) said he was “struck” by the amount of power given to the Federal Reserve under this draft plan. Garret added that he was “uncomfortable” with the “sweeping, unchecked power” that, under the draft legislation, could be granted to “an entity that failed to effectively regulate many of the large bank holding companies already under its purview.”


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