WASHINGTON — Fine points are being finalized in the sweeping overhaul of financial regulation now before congressional negotiators, yet one change is abundantly clear: Regulators, not lawmakers, will fill in the blanks to ensure that Wall Street can never again inflict such pain on the nation.
That itself is controversial.
The track record for financial regulators wasn't good going into the crisis, and some critics, mostly Democrats, believe that Congress shouldn't be giving bank regulators such discretion in implementing new rules.
Critics on the right complain that such discretion might allow regulators to create new bureaucratic hurdles and paperwork that'll crush small business.
"The name of the game, here, is regulatory discretion," observed Richard Fisher, the head of the Federal Reserve Bank of Dallas, in a provocative June 3 speech entitled "Financial Reform or Financial Dementia."
The problem, he said, is that for all the language encouraging regulators to minimize risk and prevent rewarding bad actors by saving them, regulators will retain lots of room to maneuver.
"Regulators must now decide exactly how they will travel down that path," Fisher said. "The sad truth is that when the chips are down, regulators become more reluctant to put their money where their mouths are_ or more precisely, they become too eager to put their money where they said they would not."
Among key decisions Congress is leaving to regulators, the Federal Reserve will get to decide whether a financial institution is so large — dubbed too big to fail_ that its potential failure threatens the entire financial system. The Fed could order the institution to spin off lines of business to get smaller.
And regulators, sitting together, must fill in the blanks on a host of future banking standards. They'll do so through the Financial Stability Oversight Council, to be created by the legislation. It would make recommendations on how much capital a bank must keep in reserve, how much access it has to that capital on short notice, and how it should manage risks.
Some liberal lawmakers have been pushing, so far with little luck, to legislate clear limits for the size of banks so that there's little doubt about what constitutes too large.
"Big banks can still have an advantage in the capital market. This (problem) isn't over," said Sen. Sherrod Brown, D-Ohio, who led an effort to put a 10 percent cap on any bank holding company's share of the nation's total insured deposits.
Sen. Maria Cantwell, D-Wash., one of two Democrats who voted against the Senate's version of the bill, is concerned that the legislation doesn't put enough restrictions on potentially risky activities, notably derivatives trading.
"It sets up a process for responding the next time we have a financial crisis," she said, "but it doesn't prevent this kind of thing from ever happening again."
Experts are divided on whether to leave it to regulators to make final determinations.
"There's nothing wrong with that. It's appropriate for Congress to delegate to the regulators. That's why we have regulators," said Robert Litan, an expert on regulation for the Kauffman Foundation, a Kansas City, Mo., research group focused on entrepreneurship. "If too much detail was spelled out in the legislation, it would result in too much inflexibility."
Another benefit, he said, is that the rulemaking process in agencies such as the Fed, Securities and Exchange Commission, Federal Deposit Insurance Corp. and others is less politicized than the process of passing a bill by Congress.
"The financial industry is going to have an important say in whatever happens. However, they're less likely to dominate the regulatory process than they are to influence the legislative process," Litan said.
Travis Plunkett, the director of legislative affairs for the advocacy group Consumer Federation of America, strongly disagrees.
"In general, that's always the game that the financial lobbyists play. If you can't kill it, kick it to sympathetic regulators, make sure they have a lot of discretion and use your influence to try to kill or minimize the effect of what's being proposed," Plunkett said, adding that "regulatory trench warfare does not play to the skills of the public interest community."
Once regulators begin implementing new financial rules of the road, banks and other Wall Street players will be knee-deep in lawyers, Plunkett said, besieging regulators with resources that consumer advocates simply cannot match.
As if to make his point, FDIC Chairwoman Sheila Bair, in a June 15 speech in India, suggested that regulators wouldn't hurry to impose change on the financial sector.
"It will take time to properly define the stronger standards we need to achieve, and a reasonable phase-in period for new requirements should certainly be part of the discussion," she said.
For all the concern about too much discretion granted to regulators, many Republicans argue that regulators already are given too much direction from Congress in the pending legislation.
"The Obama administration has more faith in the wisdom of central government than in the private sector," said Sen. Lamar Alexander of Tennessee, the chairman of the Republican Conference, decrying what he called the "tremendous new burden" on business. "They're going to have to learn thousands of pages of new regulations."
The top Republican on the House Financial Services Committee agreed.
"The reform is not really reform," said Rep. Spencer Bachus, R-Ala. "It is just more regulation on regulations that didn't work, giving more power to regulators that didn't do their job in the first place."
Democrats say the discretion to regulators, and creation of a new regulator_ the Bureau of Consumer Financial Protection_ is the right solution.
Sen. Ben Cardin, D-Md., pushed hard to give regulators more clout.
"We want them to have the strongest possible authority," he said, "and I think that's the way we'll be able to prevent the type of meltdown we had and get away from 'too big to fail.'''
Cardin disputes the notion that the legislation won't impose enough accountability on the agencies. Thanks to the recent crisis, he expects Congress to exercise strong oversight over regulators.
"We have the clear ability to correct the problems of the past," he said.
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