Systemic Risk Authority Debate Is Key to Restructuring Battle
The "it" in question is the power to regulate systemic risk, which has become the focal point of the debate about bow best to restructure the way the government polices financial services.
Congress has already begun discussions of which agency should have the power to regulate systemic risk-defined as a threat to entire market, not just to one or several organizations.
The NCUA is lobbying Congress for the power to regulate systemic risk within the credit union world. Executive Director David Marquis recently told the Senate Banking Committee that his agency was able to "cobble together other legal authorities," to enable it to take actions to bolster corporate credit unions, including injecting capital into U.S. Central Federal Credit Union and guaranteeing the deposits of natural person credit unions in corporate credit unions.
Marquis added that the process was "makeshift and burdensome," and the agency couldn't require every corporate to participate.
He also said that because it lacked systemic risk authority his agency was unable to insure unlimited deposits in noninterest bearing business accounts, which the FDIC was able to do.
But Bert Ely, a long-time analyst of the financial services industry, said the FDIC's decision in that case was a "creative interpretation" of the FDIC Improvement Act, which Congress passed in 1991 and gave that agency additional power to regulate systemic risk in the banking industry. That measure changed the way banks pay for insurance to a risk-related system and gave the agency the power to mandate certain corrective actions.
NCUA Director of Public and Congressional Affairs John McKechnie declined to speculate on Congress' intent with the 1991 law but said the FDIC's action was aimed at preventing a potential run on the banks that have those accounts.
He said the NCUA wants comparable authority to deal with potential risks to the credit union system and added that, "In the future, the systemic problem that presents itself to NCUA might be entirely different than runs on transactional accounts."
Ely contends that the NCUA's effort to gain additional regulatory agenda goes beyond the question of systemic risk.
"The issue is one of competitive parity. It's a stalking horse for a lot of other issues that are below the surface. You have to deal with other issues that have long been at the center of the dispute between banks and credit unions, such as the question of member business loans and the question of credit unions' tax status," he said.
CUNA, NAFCU and NASCUS have expressed support for giving the NCUA additional authority to regulate systemic risk. NASCUS wants to be certain that any realignment of federal powers doesn't take away from the role that state regulators have under the existing dual charter system.
"Federal-state cooperation and consultation is critical if you are expanding authority. If you draw on the expertise of many regulators, there is a greater chance of dealing with an issue and anticipating a problem before it reaches a critical mass," said NASCUS President/CEO Mary Martha Fortney.
Another issue that Congress will be dealing with is where NCUA will fit in a broader regulatory structure.
The Obama administration's proposal for revamping the way financial services are regulated discusses the creation of a broad systemic risk regulator. So far, Treasury Secretary Timothy Geithner hasn't expressed a public preference about which agency should have those powers nor has he mentioned anything about the NCUA's potential role.
Geithner told lawmakers last month that the administration's primary goals include closing the gaps in existing regulation and preventing large financial firms being able to choose their regulator.
He said any systemic risk regulator should have "responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities."
House Financial Services Committee Chairman Barney Frank (D-Mass.) has said he favors making the Federal Reserve the systemic risk regulator and has also expressed support for keeping the NCUA as a separate agency.
Senate Banking Committee Chairman Christopher Dodd (D-Conn.) favors giving the FDIC the power to regulate systemic risk. He contends that giving additional power to the Fed would create a conflict with its power to set monetary policy, and he also says the regulator hasn't done an effective job of regulating mortgage lending or overseeing bank holding companies. He hasn't spoken out about the role of the NCUA, but during a speech at CUNA's Governmental Affairs Conference in February, he praised the work of credit unions, saying, "I regret you are paying the price for errors made by others.''
CUNA Senior Vice President and Deputy General Counsel Mary Mitchell Dunn said putting credit unions under the same regulator as other financial institutions could cause a blurring of the differences.
"Without a regulator who understands the uniqueness of credit unions, there will be a tendency toward finding policies that work for everyone. We want
credit unions' uniqueness to be preserved, not eroded," she said.