US Treasury, Fed Stress Need To Be Able To Wind Down Non-Banks
March 24 2009 - 11:06AM
Dow Jones News
The U.S. government needs to be able to take over and wind down
a broad range of economically important non-bank financial
institutions, top economic officials told Congress on Tuesday,
though who will get that authority was left as an open
question.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary
Timothy Geithner told U.S. House lawmakers that the government's
experience with American International Group Inc. (AIG) highlights
the need to deal with increasingly complex and systemically
important institutions.
"If a federal agency had had such tools on Sept. 16, they could
have been used to put AIG into conservatorship or receivership,
unwind it slowly, protect policyholders, and impose haircuts on
creditors and counterparties as appropriate," Bernanke told the
House Financial Services Committee.
Geithner said such authority should rest with the Treasury, a
step that would mark a major shift in U.S. regulatory policy. He
said the Obama administration wants the government to be able to
act as conservator for large financial firms teetering on the brink
of collapse, authority that would allow policymakers to renegotiate
or cancel existing contracts, and sell or transfer a firm's assets
or liabilities.
"This proposed legislation would fill a significant void in the
current financial services regulatory structure with respect to
non-bank financial institutions," Geithner said.
Treasury is looking to expand its oversight portfolio at a time
when the White House and Congress are considering a major overhaul
of the U.S. regulatory system. In addition to giving some agency
resolution authority, policymakers have also said they want to give
one regulatory body the ability to monitor risks to the financial
system as a whole.
Bernanke, whose Federal Reserve has been frequently named as the
potential "systemic risk regulator," notably didn't suggest which
agency should be given oversight over non-bank financial companies.
Instead, he just said the authorities need to be put in place.
"Unfortunately, federal bankruptcy laws do not sufficiently
protect the public's strong interest in ensuring the orderly
resolution of non-depository financial institutions when a failure
would pose substantial systemic risks," Bernanke said.
The creation of any resolution authority would rely on
legislation enacted by Congress, and top lawmakers suggested
Tuesday they agree with the need for broader oversight over
financial companies. House Financial Services Chairman Barney
Frank, D-Mass., praised the way the Federal Deposit Insurance Corp.
has been able to effectively deal with collapsing banks and
suggested that agency should be a model for creating a system for
dealing with large companies.
"We need to give somebody, somewhere in the federal government
the power" to put failing non-banks "out of their misery," Frank
said at the hearing.
The initial legislative steps could be taken as soon as the end
of this month. Democratic staff on the Financial Services panel
advised the committee last week that they could take up a bill
dealing with regulation of non-bank financial companies as soon as
March 31, when the committee is already scheduled to consider other
legislation.
-By Michael R. Crittenden and Maya Jackson Randall, Dow Jones
Newswires; 202-862-9273; michael.crittenden@dowjones.com