White House economic adviser Austan Goolsbee, is critical of the plan Senate Banking Chairman Christopher Dodd, D-Conn., has proposed to overhaul regulation of the financial system. Goolsbee says the plan could open regulatory gaps and sow confusion in the financial system by consolidating banking regulation in a single agency. Competing plans coming from the administration and House would actually boost the Fed's authority over holding companies.
Dodd's proposal would also give a council of regulators power to oversee risks to the financial system. The council could impose new rules on firms deemed threatening to the overall stability of the system, including increased capital requirements and, in extreme cases, break up large financial institutions.
Deputy Treasury Secretary Neal Wolin points out that the Fed's role as lender of last resort depends importantly on its supervision of the largest, most interconnected firms.
"Supervision gives it deep understanding and timely access to information about the banking sector, payments systems, and capital markets," Wolin said. "Stripped of its supervisory role, the Fed would not have timely and complete information in a crisis."