WASHINGTON (CN) – Treasury Secretary Timothy Geithner called on Congress to limit the Federal Reserve’s power to extend credit to failing banks and pressed for limits on the size of financial firms. Geithner on Thursday pressed a broad package of financial reforms that would expand the government’s role in resolving failing financial institutions while taking taxpayers off the hook for losses.
“The Federal Reserve’s ability to extend credit to failing non-bank firms should be eliminated,” Geithner told members of the House Financial Services Committee.
He said that any move by the Fed to extend credit to financial institutions should require written permission from the Treasury and the Federal Deposit Insurance Corporation, and said the Fed should only be allowed to provide credit to healthy firms in a credit strapped market.
Geithner also pushed for new federal powers to limit the size of large financial firms. “Regulators must be empowered with explicit authority to force major financial firms to reduce their size or restrict the scope of their activities,” he said.
He threw his weight behind the bill the financial committee now considers in saying it satisfies his requirements to qualify as an effective set of reforms, mainly that it expands government authority to resolve failing financial institutions while taking taxpayers off the hook for damages.
The legislation was written in close consultation with the White House.
“That cannot happen again,” Geithner said of the massive federal bailouts of large, collapsing, “too big to fail” firms. “No financial system can operate efficiently if financial institutions and investors assume that the government will protect them from the consequences of failure.”
Critics expressed concern that the legislation would make apparent criteria for larger and important firms, which might give managers the impression their firms wouldn’t be allowed to fail.
But Geithner said that the only authority the government would have would be to manage an institution’s failure.
The legislation would designate the Fed as the main supervisor of the nation’s largest firms and would set up an oversight council led by the Treasury department, with the power to impose stricter regulatory standards on larger companies.
The bill would shift losses of an institution to shareholders and creditors, and if they couldn’t pay enough, to other large financial institutions.
Financial institutions with over $10 billion in assets could be called upon to pay fees to cover the costs of dismantling or rescuing another financial firm.
While most failures will be handled by the traditional method of filing for bankruptcy, the new regulatory framework under the bill would act faster and it would take into account the spill-over effects of a failing institution on the financial system, Geithner said.
A failing firm could be liquidated or sold or wound down by the government, and if the firm survives, the government could demand that the managers responsible for the failure be replaced.
However, any move to wind-down a financial institution would have to be agreed upon by the FDIC, the Fed, and the Treasury.