By Karey Wutkowski
WASHINGTON (Reuters) - The U.S. Congress needs to create a systemic risk regulator to monitor the safety and soundness of the nation's entire financial system, corporate governance experts told lawmakers on Wednesday, but they disagreed on who should be given that responsibility.
A Senate committee held a hearing to study how Congress should reshape federal regulatory agencies to ensure that no one institution can endanger the whole financial system.
The study comes on the heels of a series of multibillion-dollar government bailouts for companies such as giant insurer American International Group Inc
"As we know from the historic economic crisis facing our country, the financial regulatory system is broken," said Senator Joe Lieberman, chairman of the Senate Committee on Homeland Security and Governmental Affairs.
The experts agreed that regulatory changes are needed to prevent such risks in the future. Some said the Federal Reserve is the ideal body to take on the role of systemic risk regulator, while others said it should be a whole new agency or a collection of regulators.
"If the Federal Reserve Board is going to bail out a broad array of financial institutions, and not just banks, it should have the power to monitor systemic risks so it can help keep institutions from getting to the brink of failure," said Robert Pozen, chairman of MFS Investment Management of Boston and a lecturer on corporate governance at Harvard University.
Former Treasury Secretary Henry Paulson last March suggested in his blueprint for regulatory reform that the Fed's powers should be expanded.
Barney Frank, Democratic chairman of the House of Representatives Financial Services Committee, has since said the Fed should be the systemic risk regulator. Chris Dodd, chairman of the Senate Banking Committee, has said he would like to see a systemic risk regulator but has expressed reservations about giving the Fed additional responsibilities that could compromise its consumer protection mandate.
The Obama administration has said it wants guidelines for financial regulatory reform in place by early April.
Some of Wednesday's witnesses voiced reservations about greatly expanding the Fed's powers.
Damon Silvers, associate general counsel for the AFL-CIO, the country's largest labor federation, said the Fed's role as central banker demands it keep its distance from politics.
He also said the Fed inherently has some limitations.
"While the Fed can offer liquidity, many actual bailouts require equity infusions, which the Fed cannot currently make, nor should it be able to, as long as the Fed continues to seek to exist as a not entirely public institution," Silvers said.
Silvers said a better solution is to create a body made up of the key financial regulators to monitor systemic risk. He said such a body would have broader access to information about financial firms and could be fully public and transparent.
Robert Litan, a senior researcher and policy expert at the Kauffman Foundation, proposed overhauling federal financial regulatory activities into two super agencies -- a financial solvency regulator and a federal consumer protection regulator.
The financial solvency regulator would be given systemic risk responsibilities.
But Litan said he realized he will not get his "ideal world" solution and said making the Fed the systemic risk regulator is the second-best option.
"After all, the Fed is likely to pay all or most of the bill for the failures of (systemically important institutions) in the future," Litan said. "The Fed is a logical, and probably the most politically feasible, choice for systemic risk regulator."
Lieberman said lawmakers have a large task in redesigning financial regulation.
"We cannot expect the creation of a systemic risk regulator to be a universal remedy for all that ails our financial services industry today," Lieberman said. "As always, the devil is in the details."
(Reporting by Karey Wutkowski; editing by John Wallace and Tim Dobbyn)
