Senator Susan Collins, Ranking Member of the Senate Homeland Security and Governmental Affairs Committee and the Senate Financial Services Appropriations Subcommittee, today spoke on the Senate floor in response to the Administration’s announced financial regulatory reform proposal. In March, the Senator introduced The Financial System Stabilization and Reform Act (FSSRA) of 2009, establishing a Financial Stability Council. Her comments follow:
“In several respects, the President’s financial reform proposal parallels reforms included in legislation I introduced to fundamentally transform our nation’s financial regulatory system. The bill I introduced in March would create a council of regulators to act as the systemic risk monitor, require stronger safety and soundness regulation, close the loophole on the regulation of credit default swaps, and eliminate the Office of Thrift Supervision, among other provisions.
“There’s widespread consensus that we do need a systemic risk monitor so that one entity is looking across the financial system and identifying regulatory black holes and high-risk practices, policies or products that could put our financial markets at risk. I am pleased that the Administration is proposing the creation of a council of regulators to ensure that many perspectives and areas of expertise are brought to the table.
“To my mind, the President’s decision to rely on a council model makes his proposal a far more practical and effective approach than alternatives which would have required the restructuring of most or all of the federal agencies that currently oversee our financial system. The effort to achieve such a massive consolidation would take years to implement, and as the experience in the United Kingdom demonstrates, there is no guarantee that the nation’s economy would be shielded from systemic risk even after such a consolidation were completed.
“Under my proposal, a Financial Stability Council would be the primary entity responsible for detecting systemic risk and taking action to protect against that risk. While I am pleased that the President has chosen the council of regulators model as well, I differ with his proposal to have the Secretary of the Treasury Department serve as the head of that Council. Instead, I believe the Council must be headed by a chairman subject to oversight by Congress, who is dedicated entirely to the mission of the Council and is independent of any particular agency on the Council.
“The Chairman of the Federal Reserve would be a member of the Council I have proposed, and of course, the nation’s top banker will play a critical role in how the Council discharges its responsibilities. But in my view, the Federal Reserve already has enough on its plate and should not be distracted from its chief responsibilities by being asked to lead the new council.
“With respect to the ‘too big to fail’ problem, my legislation would give the Council the authority to make sure large financial institutions do not imperil the system by imposing higher capital requirements on them as they grow in size or by raising their risk premiums, or by requiring them to hold a larger percentage of their debt as long-term debt. The President also proposes that the Council play a role in setting these requirements.
“I support the President’s proposal to regulate and bring transparency to the derivatives market, including the over-the-counter market. This is a large, complex market where some companies are trying to enter into legitimate hedging contracts, but many other financial institutions have been engaged in a tangled web of interlocking contracts that are extremely difficult to evaluate. The lack of regulation and transparency in this area led to the near failure of AIG, which had engaged in hundreds of these contracts in the form of credit-default swaps. But AIG’s experience should not be used as an excuse to alter the authority of the states to regulate insurance – it was the non-insurance financial services of AIG’s subsidiary, AIG-FP that led to the AIG debacle.
“As a former Maine financial regulator, I am convinced that financial regulatory reform is essential to restoring public confidence in our financial markets and to preventing a recurrence of a crisis like the one we now face. I applaud the Administration for making this reform a priority.
“America’s Main Street small businesses, homeowners, employees, savers, and investors deserve the protection of an effective, new regulatory system that modernizes regulatory agencies, sets safety and soundness requirements for financial institutions to prevent excessive leverage, and improves oversight, accountability, and transparency. I look forward to working closely with the Administration to achieve these goals.”