As they continue efforts to revamp U.S. financial services regulation, lawmakers are now trying to tackle the thorny issue of “systemic risk”—in particular, what exactly it is and how to deal with it in an effort to avoid another financial meltdown.

That was the topic of the first in a series of planned hearings by the House Financial Services Committee as it mulls the creation of a “systemic risk regulator” to monitor market-wide risk. The committee sought input from consumer and labor advocates and representatives from the financial services industry at a March 17 hearing.

Committee Chairman Barney Frank (D-Mass.) said he hopes Congress can begin the “lengthy process” of drafting the legislation that will be the basis for overhauling the U.S. regulatory structure in early May.

As they take on the issue of systemic risk, members of Congress must first come to agreement on what exactly the term means, what powers a regulator charged with overseeing it should have, and how it would identify and deal with institutions that pose such risk. As remarks during the hearing demonstrated, all of those issues are still up for debate.

One concern raised about the creation of such a regulator is that it would simply prop up ailing institutions at taxpayers’ expense. At the hearing’s outset, Alabama Republican Spencer Bachus said any systemic risk regulator “should not have the power to commit or obligate billions or hundreds of billions of taxpayer money to bailing out the so-called too-big-too-fail institutions.” In event of failure of one of the “too big too fail institutions,” he said such a regulator’s role should be to “advance an orderly resolution, not to add to taxpayer funding.”

During the discussion, some panelists and lawmakers indicated general support for a plan outlined by Federal Reserve Chairman Ben Bernanke in March 10 remarks for a systemic risk authority to oversee firms deemed “too big to fail.”

Timothy Ryan, president and chief executive officer of the Securities Industry & Financial Markets Association, said he agreed with Bernanke that the mission of such a regulator should include “monitoring systemic risks across firms and markets ... assessing the potential for practices or products to increase systemic risk; and identifying regulatory gaps that have systemic impact.”

However, Peter Wallison, a fellow at the American Enterprise Institute, a Washington think-tank, along with some lawmakers at the hearing, argued against having a systemic risk regulator with the power to designate firms as “too big to fail.”

Wallison said giving a government agency that power has the “potential to destroy competition” because such firms would be viewed by the market as having an implicit government guarantee.

Another issue is whether to give that power to the Federal Reserve or some other agency, or to build a new regulator from scratch. While some panelists said there are good arguments for giving that authority to the Fed, some also cautioned that doing so could create conflicts that would have to be addressed.

President and CEO of The Financial Services Roundtable Steve Bartlett noted that the Fed has the “institutional knowledge” to serve as a market stability regulator.

However, if Congress does designate the Fed as a systemic risk regulator, Travis Plunkett, legislative director for the Consumer Federation of America, said lawmakers must take steps to address the Fed’s “lack of transparency and accountability and the potential for conflicts between roles of setting monetary policy and regulating for systemic risks.”

Wallison, meanwhile, said the Fed would be the “worst choice” for systemic regulator because it could bail out the companies it supervises without Congress’ approval, and its regulatory responsibilities would conflict with its central banking role.

Compliance Week will provide readers with full coverage of the hearing in its March 24 edition.

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