WASHINGTON (CN) – A group of leading federal regulators appeared before a Senate committee Thursday to discuss implementing the recently enacted Wall Street reform bill, the largest set of financial overhaul measures since the Great Depression.
“There will be another crisis as certain as we are sitting here,” said Senate Banking Committee Chair Sen. Chris Dodd, D-Conn., co-sponsor of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July.
The Act gives the government the power to wind down large firms that pose a threat to the financial system.
Dodd said he could not “legislate morality” or keep “a trader from gambling away his firm’s bottom line,” but said the 848-page bill was designed to help the government intervene in another economic crisis “before it wrecks the economy.”
The Act establishes a new consumer protection agency, the Consumer Financial Protection Bureau, to regulate financial transactions such as credit card and mortgage agreements. Deputy Treasury Secretary Neil Wolin said the Treasury Department is setting up the skeleton of the agency, including the human resources and IT structure, and expects the agency to be up and running in July 2011.
The Act also establishes a 10-member Financial Stability Oversight Council, which includes the heads of the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
The regulatory heads said the biggest priority for the new council was to identify non-bank institutions that could pose a risk to the overall health of the financial system, and therefore need regulatory scrutiny. The heads expected to count firms, utilities, clearinghouses and other non-bank financial companies among these systemic players.
Dodd’s biggest concern was that the regulator heads would start sending lower-ranking members of their agencies to attend council meetings, diluting the importance of the group over time and creating a complacency that could contribute to a future economic crisis.
“It’s very important how this starts,” Dodd said. “I cannot legislate culture.”
The regulators all gave their assurance that they would personally attend the meetings.
Federal Reserve Chair Ben Bernanke noted that banks are beginning to look at risks to the larger financial enterprise instead of just focusing inward.
“Things are moving in the right direction,” he said.
He described the Fed’s approach as “macro-credential and multidisciplinary,” linking various expertise within the agency, such as economic, finance and legal knowledge, to improve the financial system’s overall health.
He said the Fed has enacted a “vamped supervisory system” to perform “stress tests,” or quantitative surveys, on banks to evaluate their health, look at the books of individual banks, and study housing trends and mortgage delinquencies. If these types of measures were in place before the 2008 financial collapse, Bernanke said, the Fed might have been able to pick up macroeconomic trends, gaps in oversight, and broad-based risks that it missed prior to this crisis.
“This is our intellectual framework for addressing that,” Bernanke said. He said it would be impossible to tell how much of an effect the new measures were having until the economy was running like normal again, because banks balance sheets are fairly conservative right now due to the weakened economic situation.
Bernanke also said the Fed is making its balance sheets transparent, disclosing summaries of all its communication with banks, consumer associations, and academics on potential new regulations, and considering ways to make the results of its stress tests public.
“We have moved first and we’ve set an important and high bar,” Bernanke said of the U.S. regulatory crackdown on the global stage, adding that it has been “well received” around the world.
Securities and Exchange Commission Chair Mary Schapiro said that, for her part, the commission had set up several email inboxes to allow for public comment on new regulations, such as subjecting executive pay at big banks to shareholder vote. She said the agency has received thousands of public comments so far.
Schapiro also detailed an annual examination cycle for credit ratings agencies for the committee.
“I hope it works,” said Ranking Member Sen. Richard Shelby, R-Ala.
“So do we,” Schapiro replied.