Administration officials said today they were opposed to Congress setting capital ratios for large financial institutions, arguing that it would not provide regulators with enough flexibility to ensure that a firm does not become too big to fail.
Treasury Deputy Secretary Neal Wolin said the Obama administration was against a strict limit for setting a firm's debt-to-equity ratio because it would make it harder to adjust to market conditions that could change in the future. "At the end of the day, it's important the regulators have sufficient flexibility to be able to adjust the details [of] the ratios, the numbers and so forth as the world turns. And that we don't embed in statute something in three years time that will look like history passed by," Wolin said during a briefing over legislation that would revamp the nation's financial regulatory system.
The Senate is slated to take up the measure this month and Banking Chairman Christopher Dodd's bill does not set limits. Instead, it would allow a council of regulators to make recommendations to the Federal Reserve over such limits.
Some liberal critics have questioned the lack of a set ratio in the Dodd bill. But Treasury Assistant Secretary Michael Barr noted that both Fannie Mae and Freddie Mac were under capital standards, which did not prevent them from suffering a cash crunch in September 2008 and forcing the federal government to take them over. "We have to have the system that makes sure we have a way of staying one step ahead," Barr said. He also noted that the Dodd bill places other limits on firms, such as expanding the 10-percent cap on what each bank can hold in the deposit market to all of their other financial activities, and including nonbanks under the limit.
The two also indicated that the administration would fight hard for an independent Consumer Financial Protection Agency, which has been a source of opposition from Republicans, who want to limit its scope. Wolin said the administration opposes a carve-outs to any industry, noting that an exclusion for auto dealers would be a "good example" of weakening the bill. But the auto dealers have shown significant lobbying prowess, getting a carve-out in the House bill that even Financial Services Chairman Barney Frank said was too broad. The Dodd bill is more broad.