Members of Congress and the general public may not be told of "potential emerging threats to the stability of the financial system," thanks to a Thursday vote by a House panel shepherding the bill that's supposed to end "too big to fail."
An amendment offered by Rep. Gregory Meeks (D-N.Y.) and unanimously approved by a voice vote in the House Financial Services Committee specifically deletes a provision in the Financial Stability Improvement Act of 2009.
The two draft versions of the bill originally called for the proposed overseer of threats to the entire financial system to prepare an annual report to Congress describing, among other things, "significant financial market developments and potential emerging threats to the stability of the financial system."
But on Thursday, Meeks' amendment deleted that language and instead compels the council to describe:
"Significant financial and regulatory developments, including insurance and accounting regulations and standards, and assesses the impact of those developments on the stability of the financial system."
Thus, "potential emerging threats" was replaced by "financial and regulatory developments."
Groups advocating for financial reform criticized the move.
"Instead of looking out and actually trying to protect the system, the goal appears to be to make sure we have the regulatory structure that is most amenable to corporate interests of anywhere in the world," said Heather Slavkin, senior legal and policy adviser at AFL-CIO. "It's a complete shift in the purpose and goal of the [systemic risk regulator].
Barbara Roper, director of investor protection at the Consumer Federation of America, said of Meeks' amendment, "that language is a prescription for a race to the bottom in terms of regulation."
During Thursday's debate, Rep. Mel Watt, a senior Democrat on the committee, also expressed concern about another aspect of Meeks' amendment.
The amendment additionally calls for the council to monitor international developments in financial, insurance and accounting regulations, and to specifically identify those that may "place United States financial services firms or United States financial markets at a competitive disadvantage."
"Part of what we're addressing here when we deal with systemic risk is a race to the bottom," said Watt, of North Carolina. "We need to be careful not to leave the impression that competitive disadvantage trumps safety and soundness."
During the debate, Meeks defended his amendment:
We must work with our counterparts around the world to elevate the playing field to a higher global standard, monitor international regulatory developments to ensure that our firms remain globally competitive and to prevent international regulatory shopping, and the inevitable buildup of systemic risk outside our borders, outside of our regulatory reach, and beyond our capacity to act.
As happened domestically with individual regulators in the years leading up of the financial crisis, it is quite possible for the members of the council to become so focused on the domestic trees that they fail to see the forest of the international regulatory landscape and its evolution. This amendment would explicitly require them to monitor this global landscape, its impact on the competitiveness of the American financial sector, as well as any new emerging pockets of systemic risks which could spill over into our economy, triggering another financial crisis.
In June the Obama administration released a white paper outlining its plan to reform the way banks and financial firms are regulated. There were gaps in the system, simply put, which played a role in the collapse last fall.
In that paper, the administration called for the formation of the council. It would identify "emerging systemic risks" and "emerging risks in firms and market activities." It would also "identify gaps in regulation and prepare an annual report to Congress on market developments and potential emerging risks."
The bill that emerged calls for a council to oversee risks to the entire financial system, which includes firms and activities that pose such a risk. The firms that required billions in taxpayer funds to keep them afloat, like Citigroup and AIG, and those that ultimately flopped, like Lehman Brothers and Bear Stearns, are the kind of financial companies the bill would target. The activities include some of the things that worsened the crisis last fall, like firms' unfunded liabilities -- which ultimately were paid by taxpayers, like the billions paid out to honor AIG's derivatives contracts.
Now, the bill in Chairman Barney Frank's Financial Services committee does call for this proposed council to look for and address such dangers; however, Meeks' amendment deleted the provision that the information be relayed to Congress, and thus the public.
In an interview, Meeks' legislative director, Milan Dalal, said the bill's original language of "potential emerging threats" was "very dangerous. The purpose is to make the language clearer and more concise."
Dalal added that regulators may "have different definitions of 'threats'" and that Meeks' amendment does not necessarily preclude the council from reporting to Congress and the public threats that exist to the financial system.
"It's not just threats. We're trying to make it so the regulators have more information to look at," he said. "We're looking at developments as well.
"There might be a new development that we might want to take into account, like 'Oh, England is doing something that we think we should take a look at as well, and consider implementing. It may not be a threat that's going on over there, but it's something that we might want to consider as well."
CFA's Roper remains skeptical.
"You do start to get the picture that the legislation responding to a crisis that was brought about by lax regulation will perpetuate that same approach."