Kansas Fed Economists Critical Of House Financial Regulation
Overhaul
By Corey Boles, Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- A new Federal Reserve Bank of Kansas City study is
critical of a proposed overhaul of financial industry regulation, saying too
much authority would be concentrated in the hands of the treasury secretary.
The analysis, written by two senior economists at the Kansas City Fed, said
that allowing the treasury secretary to determine which large financial firms
are systemically risky, and when a firm is in danger of default, could lead to "
greater political interference."
The report's authors are Charles Morris, a vice president and senior
economist, and Kenneth Spong, a senior economist at the Kansas City Fed, one of
12 regional branches of the Fed system.
It is rare for a regional branch of the Fed to be publicly critical of a
legislative proposal before it becomes law.
It says the latest proposal for dealing with how the federal government
intervenes with large, failing financial firms is significantly better than the
original Treasury plan, but that it still causes concern.
The proposal agreed to by Treasury Secretary Timothy Geithner and House
Financial Services Chairman Barney Frank (D., Mass.) would see the creation of a
Financial Services Oversight Council. That council would be comprised of federal
financial regulators, and would have a broad oversight role over the industry.
The Senate has yet to release details of its regulatory overhaul, although
lawmakers there are known to be considering a similar systemic risk council.
It would be chaired by the treasury secretary, who would have the final call
as to when the federal government intervenes to save or unwind a troubled
financial company.
"Replacing independent regulators with the Treasury Department as the final
authority in this decision process could lead to delays or second-guessing of
supervisory recommendations and greater political interference," the analysis
concludes.
The paper's criticism of the legislation also said it would create uncertainty
as to which financial holding companies would be unwound under traditional
Chapter 11 bankruptcy law and which ones would be subject to the new unwinding
process.
It said that creditors and stockholders should know before they invest in a
company how claims would be handled in the event that company fails.
The proposal would currently not permit the federal government to use its new
unwinding powers if a company failed that hadn't been identified in advance as a
risk to the wider financial system.
The economists argue a second group of companies should be determined that
could be systemically risky in some occasions, and could be potentially subject
to the unwinding authorities.
Another criticism is that while all financial companies with $10 billion or
more in assets would have to contribute to a fund to pay for the unwinding
authority, only a small number of them would stand to be impacted by that
authority.
-By Corey Boles, Dow Jones Newswires; 202-862-6601; corey.boles@dowjones.com
(Michael R. Crittenden contributed to this article.)
(END) Dow Jones Newswires
11-03-091337ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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