Barney Frank eyes new government powers to end 'too big to fail'

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, circulated legislation on Tuesday that aims to prevent future bailouts by giving the federal government new powers to deal with failing financial firms.

The legislation attempts to resolve one of the most controversial questions of the overhaul of the financial system: the problem of “too big to fail.”

The legislation gives new power to the Federal Deposit Insurance Corporation (FDIC) to extend credit or other obligations to solvent firms if they threaten the financial system. Such resolution authority would require the written approval of the Federal Reserve and FDIC and the written consent of the Treasury Secretary.

Firms with less than $10 billion in assets would not be assessed by federal regulators under the legislation. The legislation would levy a much heavier burden on the nation's top roughly 115 financial firms than the thousands of smaller community banks that have argued they did not cause the financial crisis.

The Obama administration and congressional allies have been pushing for new powers to regulate “systemic risk” and wind down massive financial firms that threaten the broader economy. Treasury Secretary Timothy Geithner has said this is one of the most important aspects of the regulatory overhaul and that the government should not be in position in the future of having to seek bailout money from Congress.

But the debate has been highly controversial because it implicates the future role of the Federal Reserve. Democrat and Republican critics have argued that the central bank was lax in its regulation of major American banks in the run-up to the crisis and should not necessarily be granted additional power to regulate systemic risk.

The legislation calls for a new Financial Services Oversight Council in the federal government to monitor systemic risks.

The council would comprise the heads of the nation’s bank regulators and would be chaired by the Treasury Department, not the Federal Reserve, Frank’s office said on Tuesday.

The council would identify firms that pose a threat to the financial stability of the broader economy and could require that those firms be subject to heightened oversight. The council would not be considered a federal agency under law and would also not be subject to the Federal Advisory Committee Act.

The legislation would also give the Federal Reserve specific power to regulate firms for financial stability. The central bank would be required to review firms’ leverage limits, liquidity, risk-based capital requirements and other measures.

“The Fed will have back-up authority to step in if regulators do not act quickly to address developing problems identified by the council,” the committee said in a statement.

The central bank would also have the power, when it reviews firms, to require financial holding companies to “sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms.” The central bank could also require that the firms terminate certain activities or impose other conditions.

The legislation would also preserve the federal charter for thrifts -- savings and loans firms -- but would shift all the current powers of the Office of Thrift Supervision (OTS) to the Office of the Comptroller of the Currency (OCC).

Lawmakers have come down hard on the OTS for regulatory lapses over many of the nation's largest mortgage lenders whose failures spurred the housing market crash. OTS also had oversight of American International Group (AIG) at the federal level.

Frank's bill would also mandate existing non-banks, industrial loan companies and other similar companies that engage in commercial activity to create a bank holding company. The legislation would ban any new commercial firms from owning a bank, industrial loan company or holding a specialty bank charter.