Greater transparency from banks, corporations and other market players will be demanded under the overhaul of the U.S. financial rules that Congress is embarking on, but the role of the Federal Reserve is an early sticking point in those plans.
"We are going to send a clear message with these modernization efforts: the era of 'don't ask, don't tell' on Wall Street is over," Senate Banking Committee Chairman Sen. Christopher Dodd said Tuesday at a hearing of the panel examining possible approaches to the massive project of revamping the regulatory regime.
The committee heard from experts and interest-group representatives as Fed Chairman Ben Bernanke said the overhaul was needed to strengthen oversight of banks, mutual funds and big financial institutions whose collapse would imperil the entire economy. Bernanke, speaking in another forum, built on previous suggestions to bolster mutual funds and a program that insures bank deposits, and repeated his call for Congress to create a system to cushion fallout from the failure of a large financial institution.
Congress and the Obama administration are starting to craft their strategies for overhauling a patchwork regulatory system that dates to the Civil War. They are striving to erect a new system that will prevent a repeat of the financial crisis gripping the U.S. and the global economy.
One leading idea is the creation of a so-called systemic regulator to monitor against the sorts of risks that plunged the markets into distress last year. Rep. Barney Frank, chairman of the House Financial Services Committee, has proposed the Fed assume that role.
Columbia University law professor John Coffee, said the central bank was uniquely suited to it. All big financial institutions must be subjected to "financial adult supervision" by a single regulator, and the Fed alone is capable of providing that oversight, he said.
But Dodd has been cooler to that approach and said Tuesday that puts him in a quandary: "What's the alternative" to the Fed?
"I don't bring any ideological framework whatsoever to this," Dodd said of the overhaul effort. What's needed is "a solid, sound system that reflects the times we're in" but is not so rigid that it stifles financial innovation, he added.
Damon Silvers, associate general counsel of the AFL-CIO and a member of the panel overseeing the government's multibillion-dollar financial bailout plan, said there were "profoundly important" concerns about having the Fed assume the overarching regulator role. The Securities and Exchange Commission should oversee any large entity that manages public securities and any contract that touches on them, he said.
Sen. Jack Reed said some form of the so-called "twin peaks" model _ the Fed as systemic risk regulator plus the SEC overseeing consumer protection and transparency _ likely will be adopted in the overhaul, with changes to the Fed's current charter.
But Sen. Richard Shelby, the committee's senior Republican, also voiced concerns about the Fed's possible new role.
"We can't build a regulator big enough to be everywhere at all times," Shelby said. "Market participants need to do their own due diligence before and after they make an investment decision."