Regulation: Behind the Bernanke-Geithner Dustup
By Anne Flaherty, Associated Press
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke are squaring off in a public dispute over who should become the nation's top consumer watchdog.
Geithner wants to strip the Fed of its consumer protection duties and create a new federal agency designated solely to such a mission. Bernanke says those responsibilities should stay with the central bank and has suggested he is up to the task by outlining new rules for mortgage lenders.
Both officials were scheduled to make their cases on Friday, July 24, in back-to-back testimony before the House Financial Services Committee.
"We believe we can continue to do good work in this area" of consumer protections, Bernanke said on Capitol Hill this week.
Geithner's Reform Ideas In his Friday appearance, Geithner urged action on regulatory reforms, including a Consumer Financial Protection Agency (CFPA) extending federal oversight to all financial firms, while raising capital requirements to lower risk. Geithner is also aiming to improve inter-agency coordination and said that resolution authority for systemically critical firms would only be for extraordinary times and subject to strict controls.
Geithner also indicated he aims to spread these reforms to the international capital markets to constrain leverage.
FDIC Chair Sheila Bair, also appearing at the same hearings on Friday, made a bid to be part of the board of the new CFPA, which she said should be given the authority to write the new rules on consumer protection standards. She sees the soundness of insured firms going "hand in hand" with consumer protection and safety.
Bair also claimed regulators should treat off-balance-sheet assets as if they were on balance sheets.
Bernanke was expected to tell the Financial Services panel that the Fed's roles in ensuring bank soundness and protecting consumers are complementary and that they give regulators valuable insight into the behavior of both banks and their customers.
Bernanke's Future Bernanke's pushback comes as he's nearing the end of his term. Before it expires early next year, President Barack Obama will have to decide whether to reappoint him. Bernanke, an appointee of President George W. Bush, took over the Fed in February 2006.
House Democrats say they are committed to advancing Geithner's proposal, although the effort has slowed amid industry opposition.
Financial Services Committee Chairman Barney Frank (D-Mass.) delayed plans to consider the proposal this month until after Congress returns from its August recess. Nearly two dozen industry groups had written to Frank objecting to the legislation and warning that it was too broad.
Frank said he believes the bill has enough support to win approval but agreed to slow down to give the opposition a chance to weigh in.
"They've invited a national debate that I want to have," he said.
Monitoring Credit Cards, Mortgages The proposal to create a consumer protection agency is part of a broader overhaul of the nation's financial rules. The agency would monitor the fine print on such products as credit cards and mortgages. Such oversight is now scattered among the Fed and other agencies.
House Republicans have offered an alternative. Their bill would strip the Fed of its regulatory role and abolish the Office of the Comptroller of the Currency and the Office of Thrift Supervision. In their place would be a single regulator for depository institutions, which would include an office focused on consumer protections.
The Obama Administration counters that its proposed agency could monitor nonbank institutions, too, ensuring there aren't any gaps in oversight.
The Administration's plan also would tap the Fed to be the regulator of huge, globally interconnected financial companies whose collapse could endanger the entire U.S. financial system and the broader economy.
Both Democrats and Republicans on Capitol Hill are leery of giving the Fed additional powers when they think its regulatory oversight of banks and risky mortgages led to the current financial crisis.
BusinessWeek and Action Economics staff contributed to this story.