Warren Plows Forward with Financial-Sector Regulatory Aims

WASHINGTON – Three years after the nation’s most comprehensive financial regulation overhaul, regulators have announced that they are near the end of completing a series of new rules, but some lawmakers think this is not enough to stop excessive risk-taking on Wall Street.

Officials from the Federal Deposit Insurance Corporation (FDIC), Treasury Department, and the Federal Reserve were called before the Senate Banking Committee to update the status of the 2010 regulatory overhaul.

Agency officials testified they were ready to wrap up the bulk of the rules under the Dodd-Frank Act by the end of the year. The legislation requires agencies to design hundreds of new rules forbidding risky lending and investment practices that caused the 2008 economic crisis.

By the end of the year, regulators should complete implementation of a risk-based capital surcharge for systemically important banks, a liquidity rule and the Volcker rule to ban proprietary trading by banks, Fed Governor Daniel Tarullo said.

The Fed, FDIC and the Office of the Comptroller of the Currency completed work this week on bank capital rules and proposed a tougher leverage requirement for eight of the largest lenders – those with more than $700 billion of assets – to hold equity capital to 6 percent of total assets.

Requiring banks to set aside money could ensure that they remain solvent in times of financial distress and eliminates the tough choice of funding a bailout or risking the collapse of a major bank.

At the same hearing, Sen. Elizabeth Warren (D-Mass.) admonished financial regulators for not taking firms to trial and instead seeking settlements with many of the violators. Warren criticized financial regulators for allowing firms to get accustomed to paying penalties for violations without admitting guilt. The Massachusetts Democrat argued that without the threat of trial, violators have more leverage to negotiate lower fines.

“How much you can settle with them for, that is, how much they will really pay as a result of having broken the law, depends in part on how they evaluate your willingness to push them to trial,” Warren said.

Warren also urged officials to reveal more information about the nature of violations and the corresponding $9.3 billion settlements. She said the Fed had been unwilling to turn over information about the abuses committed by individual banks.

“If you had real confidence in your settlements and that if people could see the details of those settlements, what the banks did wrong and how you determined how much money would go to individual people, then the public could evaluate for itself whether or not you're really out there fighting on their behalf. And so far, you have not been willing to do that,” Warren said.

Tarullo admitted the Fed could do a better job communicating with the public about its enforcement actions against big banks. Warren asked the Fed governor whether the central bank planned to follow the Securities and Exchange Commission’s (SEC) lead in requiring admission of guilt.

SEC Chairman Mary Jo White announced a few weeks ago that her agency would begin pressing for an admission of wrongdoing from defendants when settling civil charges.

“The question I'm asking about is really how much leverage you have. And what SEC Chairman White has said is that she's going to step it up. She's going to be tougher, and she thinks that's going to give her better leverage,” Warren said.

Tarullo described the “supervisory mechanisms” in place as an effective tool to prevent violations and penalize violators in the financial sector.

“I appreciate that you have another tool that you sometimes use quietly and out of public sight,” Warren responded. “The question I am asking is whether or not you’re going to require something more public.”