Washington — Setting up a certain fight with big business, President Barack Obama is proposing a new regulatory agency to police lenders and a newly empowered Federal Reserve to guard over some of the largest and most interconnected institutions in the financial world.
The Fed’s role and an agency aimed to protect credit card and mortgage holders are two of the central elements of a broad overhaul of the financial regulatory system that the president will announce on Wednesday.
An 85-page draft of the administration’s plan, obtained Tuesday by The Associated Press, details an ambitious effort to change a regulatory regime whose foundations date back to the Great Depression.
Already the nation’s central bank, the Federal Reserve would supervise large financial institutions that are considered so big that their failure could undermine America’s economy, according to the administration proposal.
But even as the Fed gains new powers, Obama also would transfer some banking authority that now rests with the Federal Reserve and the Treasury Department to the new consumer agency — the Consumer Financial Protection Agency. In addition, the Treasury also would gain new power.
“There is going to be streamlining, consolidation and additional overlap so that you don’t find people falling through the gaps, whether it’s the consumer protection side, the investor protection side, the systemic risk that we need to make sure is avoided,” Obama said Tuesday.
The draft document calls for removing restrictions on the Fed’s ability to examine or impose restrictions on large financial holding companies and their subsidiaries. But Obama’s proposal would require the Fed, which can independently use emergency powers to bail out failing banks, to first obtain Treasury approval before extending credit to institutions in “unusual and exigent circumstances.”
The expanded Fed role and the new consumer regulator are likely to be the two main political flash points in the administration’s proposal. Many bankers oppose a new consumer protection regulator and many lawmakers in Congress worry the Fed could turn into a too-powerful and independent financial overseer. Friction over those points could slow any major overhaul of banking and market regulations.
In addition to having the Federal Reserve supervise “systemically significant” institutions, Obama will recommend a council of regulators, which would include the Fed, to monitor risk throughout the broader financial system.
The arrangement is designed to prevent any more crashes like those that felled AIG and Lehman Brothers.