The suggestion was barely out of Federal Deposit Insurance Corp. Chairman Sheila Bair's mouth before lawmakers began embracing the idea of creating a systemic risk council to oversee large financial companies.

To date discussions about a systemic regulator have centered on expanding the Federal Reserve Board's powers. For months Senate Banking Committee Chairman Chris Dodd and other senators have expressed concern about that idea, given the central bank's track record in the run-up to the financial crisis.

At a hearing Wednesday, Bair offered the first real alternative: a council composed of existing regulators that would have the "teeth" to intervene when necessary.

The idea quickly drew favor from Dodd and others.

"I am more attracted to the council idea," the Connecticut Democrat said. "It's a multiple set of eyes, rather than a single set of eyes."

Sen. Mike Johanns, R-Neb., also voiced support for the concept. "I like this idea of the panel — a group — versus a person."

Bair said the council should be made up of the Fed, the FDIC, the Treasury Department and the Securities and Exchange Commission, with the possible addition of other prudential supervisors. They should work together to track trends, follow risky products, set risk-based capital standards that extend beyond depository institutions and find ways to harness market discipline, she said.

"Part of the problem is nobody really has a handle right now on the entire system," Bair said.

The idea did not originate with Bair, but she has become its first prominent advocate. House Financial Services Committee Chairman Barney Frank, D-Mass., has called for giving the Fed the systemic-risk oversight role. The Treasury has stayed neutral on how that power should be vested.

Early critics of the council idea have said it could prove ineffective, with little power to curb abuses at large firms.

Sen. Mark Warner raised such a concern Wednesday, asking Bair how to ensure a council structure is effective.

"How would we make sure that information would be forced up and truly shared and … that this council wouldn't just simply be a debating society?" the Virginia Democrat asked. "When this council reached some conclusion, how would they act with some force?"

Bair said the council needs to have real rule-writing power and other authorities.

"Accountability would be key," she said.

"The ability to write rules and set capital standards and make recommendations … if you provide accountability and provide real legal authority, and I think you will get the result you want."

Gary Stern, the president of the Federal Reserve Bank of Minneapolis, testified at the hearing that a systemic risk regulator should be empowered to supersede a firm's primary regulator if it believes more aggressive action is needed.

"For systemic supervision to be effective, this group, whether it's an institution or a council or whatever, would have to have the ability — under dire circumstances — to intervene if it thought that a consolidated supervisor … wasn't doing an adequate, sufficient job," he said. "The systemic risk supervisor could step in and ask for more forceful action."

Stern did not give Bair's idea a blanket endorsement, though he broadly supported the same principles of what systemic risk supervision should entail.

He said that at most there should be two agencies involved in systemic risk supervision, and that the Fed should have some role, though his focus was on "how" to shape such supervision, not "who" should carry it out.

"I might have a preference for one or two, rather than several, mostly for accountability," he said regarding the number of regulators. "I don't think I have suggested the Fed as the systemic risk regulator. I do think the Fed, … given its experience, has a role to play in this, clearly, but I have not tried to weigh in on what the structure ought to be."

Though many industry observers were quick to accuse Bair of making power plays, she did single out the need for additional power for the Fed, suggesting it ought to have a stronger hand in regulating systemically important institutions.

Though the systemic risk council would address risky trends emerging across institutions and disciplines, Bair said, the Fed, with a few additions to its holding company authority, "would seem well positioned for this important role … for supervising institutions that are deemed to be systemically important."

It would focus on the adequacy of complex institutions' risk measurement and management decisions, Bair suggested in her testimony.

During the question-and-answer session, Dodd showed support for several of Bair's ideas and even demonstrated a willingness to expedite giving the FDIC resolution powers over all bank holding companies — not just systemically important ones.

Sen. Bob Corker, R-Tenn., pushed Bair on whether the FDIC would really be able to close down its Temporary Liquidity Guarantee Program by Oct. 31 as planned. He asked if it would be helpful if the FDIC received enhanced resolution powers before that date to ensure it could dismantle failing institutions efficiently.

"I would like to hear about the resolution authority piece, and I wonder if it could be done separately," Corker said. "If we end the program on Oct. 31, my sense is that we potentially may need this resolution ability in place prior to then, because then it would be my sense that there are a lot of institutions in this country that cannot survive without that program being in place."

Bair responded, "That is a valid observation."

She said that she hoped to be able to end the debt guarantee program on time, though there are no guarantees the FDIC will be able to do so. Having broader resolution powers in place would at least give the agency more options for cleaning up the banking system, she said. "Giving the FDIC the power to resolve bank and thrift holding companies could be done quickly. That could be broken off, and that would be very helpful right now."

The additional authority would give the agency other "instruments" and provide a threat to institutions in trouble, Bair said.

Dodd weighed in to say he would "take the temperature" of his colleagues to see if they could proceed with resolution powers first or put it all together in one regulatory modernization bill.

"The resolution mechanism is something we all feel very strongly about," the senator said. "I will be in conversations with my colleagues like Senator Shelby and Bob Corker … to see whether we can proceed quickly with that, or whether we will be in a situation to move forward with a larger proposal."

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