Banks Face New Regulators in Disputes Over Dodd-Frank Rules

A U.S. Senate agreement has inserted new voices into the debate on the future of the Dodd- Frank Act.

Lawmakers last night confirmed four regulatory nominees, including Thomas Hoenig and Jeremiah O. Norton as directors on the Federal Deposit Insurance Corp. board and Thomas J. Curry as comptroller of the currency. The four, along with dozens of other federal appointees, were confirmed unanimously without a vote on the Senate floor under the agreement between the White House and Republicans.

Although the lawmakers did not reach an agreement to confirm Martin J. Gruenberg as chairman and Hoenig as vice chairman, the board confirmations add new voices to the debate over the implementation of a financial overhaul that includes the so-called Volcker rule, as well as oversight of a banking system that still faces threats from the European sovereign debt crisis.

“It is vital that we have strong leaders in place at our financial regulators as we continue our economic recovery, continue implementation of the Wall Street Reform Act, and are faced with challenges from the crisis in Europe,” Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said in a statement.

Hoenig, a former president of the Federal Reserve Bank of Kansas City; Norton, a former Treasury Department official under President George W. Bush; and Curry, who has been serving as an FDIC board director, will play roles as regulators finalize a large swath of rules required by the 2010 financial regulatory overhaul. They will also complete the five-member FDIC board, where terms last six years. The comptroller holds a seat on the board, as does the director of the consumer bureau.

Thomas Hoenig may be the regulator to watch after telling lawmakers in November that big banks shouldn’t get bailouts. Photo: Andrew Harrer Close

Thomas Hoenig may be the regulator to watch after telling lawmakers in November that... Read More

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Thomas Hoenig may be the regulator to watch after telling lawmakers in November that big banks shouldn’t get bailouts. Photo: Andrew Harrer

‘Important Step’

“This is an important step as the FDIC continues to respond to a number of challenging issues and continues with the rulemaking process,” said Gruenberg, who was confirmed yesterday to another term on the FDIC board, where he will remain acting chairman.

The decision to approve Gruenberg and Hoenig without giving them the top posts was part of the deal to act on the nominations, said a Senate leadership aide who requested anonymity. Gruenberg will continue to serve as acting chairman while long-term appointments for chairman and vice chairman can be made after the presidential election, the person said.

‘Playing Politics’

“When you have acting appointments, they don’t carry as much weight or as much power,” said Kevin Jacques, a former Treasury Department economist who is now a finance professor at Baldwin-Wallace College in Berea, Ohio. “This is not the time for Congress to be playing politics with some very important positions,” he said, arguing that there are “hundreds of banks on the problem bank list” and too much significant regulatory work to be done.

“If that’s what they needed to do to move at least a portion of the nominations through, then that’s what they did,” said Michael Stevens, senior executive vice president at the Conference of State Bank Supervisors, who said he’s not concerned Gruenberg’s lesser title takes away from the FDIC’s reach. “We have clear leadership, and we have a board with the full authority to act.”

A top item on the regulators’ agenda is a rule banning banks trading with their own funds, also known as proprietary trading, required by the law. Regulators released a draft proposal of that so-called Volcker rule, so named because it was proposed by former Federal Reserve Board Chairman Paul Volcker, last year and are currently working on the final version. The rule also restricts bank investments in hedge and private equity funds.

Chief Concern

Wall Street firms including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. and Morgan Stanley (MS), through comment letters and dozens of closed-door meetings with regulators, have made clear that the Volcker rule is one of their chief concerns. Regulators have begun the process of sifting through the more than 17,000 comment letters filed by February as they attempt to finalize the rule. The FDIC and OCC are among five agencies with jurisdiction over the rule.

The impact of the new entrants into the debate remains an open question, said Brian Gardner, a Washington analyst at Keefe Bruyette & Woods Inc. Curry has not been an outspoken member of the FDIC board, and Norton, who fills former Chairman Sheila Bair’s vacated seat expiring in July 2013, offered little indication of his views in his confirmation hearing, Gardner said. Hoenig, 65, may be the regulator to watch after telling lawmakers in November that big banks shouldn’t get bailouts, according to Gardner.

Republican Backing

Both advocated by Republicans, Hoenig and Norton, a former JPMorgan Chase & Co. (JPM) banker, join the agency as it takes on broader responsibility for systemically important financial firms, including resolution authority under Dodd-Frank. The agency’s power to disband firms that pose a risk to the financial system will give Hoenig a new platform, Gardner said.

“He’s highly critical of the concept of too big to fail,” Gardner, a former congressional aide, said in a telephone interview. “He could be a leader in the regulatory community on this idea of downsizing the biggest banks.”

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said last night that the nominees were confirmed in exchange for assurances from President Barack Obama that there would be no appointments while the Senate is out of session during the congressional recess.

Logjam Broken

The nominees were confirmed unanimously under the agreement, along with dozens of other nominees for positions across the federal government, including at the Treasury Department and the Department of Housing and Urban Development.

The deal puts an end to months of speculation over when or if Republicans would approve nominees in the wake of Obama’s January recess appointment of former Ohio Attorney General Richard Cordray as director of the Consumer Financial Protection Bureau.

“I’m glad that the Senate was able to set aside partisan politics and approve these individuals,” said Johnson, the committee chairman.

Stevens, of the bank supervisors group, said he expects the new board to be effective. “We are so much better off by having a fully confirmed board at the FDIC,” he said, predicting the new board will be powerful and “incredibly effective, given their mix of backgrounds.”

To contact the reporters on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net; Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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