Frank Backs Regulator for Systemic Risk

By KARA SCANNELL

WASHINGTON -- House Financial Services Committee Chairman Barney Frank said the first priority in overhauling financial regulation is to set up an entity to oversee systemic risks of the kind that walloped Wall Street last year.

Mr. Frank, a Massachusetts Democrat, said this oversight could be given to the Federal Reserve and a general plan may be in place by April.

Barney Frank

The idea of a systemic-risk regulator, proposed by the Bush administration last year, is gaining adherents in the Obama administration and in Congress. Senate Banking Committee Chairman Christopher Dodd (D., Conn.) also has mentioned the possibility of giving that role to the Fed.

Mr. Frank's comments were part of a broader debate in Washington on how to reshape regulation to reflect lessons of the financial crisis. Many ideas are coming up in the debate, including forcing hedge funds to register and unifying bank regulation now scattered among federal agencies.

Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, believes Congress needs to find out what happened first and then examine "all options" for financial regulation, an aide said.

Mr. Frank laid out a multipart agenda for rewriting the rules. The first phase would involve the systemic-risk regulator. Mr. Frank said that even if this job goes to the Federal Reserve, he expects the Fed to maintain its oversight of banks. Information picked up during bank exams helps inform policy, he said.

Sen. Dodd and others have raised concerns about concentrating too much power within one agency. The senator is expected to explore the issue at a hearing Wednesday with former Fed Chairman Paul Volcker, who is an adviser to President Barack Obama.

Among the areas that Mr. Frank said would likely fall to the risk regulator are hedge funds, credit-rating firms and executive compensation. He didn't provide details, but said there needs to be "complete transparency" on hedge funds, and pay for financial executives needs to be examined to curb "perverse risk incentives."

Mr. Frank said he hopes to have a "general outline" of an overhaul by the April 2 meeting of the Group of 20 industrial and developing nations, but he said legislation isn't likely to be ready by then.

Phase two of the overhaul, Mr. Frank said, will deal with merging or strengthening existing regulators, such as the Securities and Exchange Commission, the Commodity Futures Trading Commission and banking regulators. He also signaled support for a financial-products safety commission, a new body that could vet products before they are sold to investors.

To prevent crises, Congress should consider requiring institutions that securitize assets to hold onto a certain portion, such as 10%, so they have more skin in the game, he said.

The regulatory deficiencies that have emerged during the past year would "suggest that it may be a well-reasoned aspect of reform that there should be some agency presiding atop the system in a coordinating role," said John Dearie, a senior policy official with the Financial Services Forum, a lobbying group that represents the chief executives of large financial firms.

He said he met with several banking executives in recent days and told them they need to "lean over backwards not to offend people" in seeking additional help from taxpayers. Eight executives from financial institutions that have received government money will be testifying next Wednesday before Congress about compensation, among other things.

Mr. Frank also talked about a federal insurance program for municipal bonds that would be paid for through premiums. He said he supports accounting standards that require valuing assets at the market price, known as mark-to-market accounting. However, he said Congress should explore ways to offset some of the consequences that come when banks take losses, such as a slowdown in lending.

Write to Kara Scannell at kara.scannell@wsj.com