Some lawmakers worried that the plan won't remove the risk posed by financial firms that gain exceptional economic clout – and pose exceptional risks to the economy – because of their sheer size. Others contended that Mr. Obama's proposed oversight panel for the financial system should have decisionmaking power, rather than just an advisory role subordinate to the Federal Reserve.
By raising these concerns, lawmakers weren't necessarily announcing opposition to the Obama plan. But the questions highlight the diversity of views in Congress and among finance experts about how to safeguard the US economy from the kind of financial crisis that erupted last year.
The 'critical test'
Mr. Geithner on Thursday offered a point-by-point defense of the plan he helped develop, but he also opened the door to working with Congress on possible changes.
"The critical test," he said in his opening statement, will be "whether we make this system strong enough to withstand the stress of future recessions and the failure of large institutions."
In a meeting of the Senate banking committee Thursday morning, Geithner said two steps would be vital to address the threat posed by financial firms considered "too big to fail." First, the Obama plan calls for the very largest financial firms to hold higher capital reserves than typical banks, and face closer supervision from regulators. Second, Geithner said, a new "resolution authority" will empower the government to take over such a giant firm and restructure it, if needed. This power would be modeled on what the Federal Deposit Insurance Corp. now does with smaller banks that become insolvent.
Privileged status for big banks?
Some senators, however, said they worry that large banks will still enjoy a privileged status of being so big that the government will prop them up in a pinch. The perception of being "too big to fail" might allow those firms to borrow money at cheaper interest rates than their smaller competitors, for example.
Geithner said this challenge "is at the heart of bank regulation." He talked about making the system "safe for failure" of a large firm. He said these large firms would face a kind of penalty for bigness – the cost of holding more capital (relative to their overall balance sheet) than smaller firms. And he said the Obama plan calls for these large firms to collectively pay the cost of any government bailouts over time. Moreover, Geithner said, America has a lower concentration of assets in big banks than other nations do.
Critics, including some prominent economists, complain that Obama's plan doesn't try to curtail the size of very large firms, and will allow their risk to persist. The result could be an economy that's less competitive as well as more vulnerable to financial crises.
A job for Federal Reserve?
Another core debate centers around who should take the lead in monitoring these large firms. Several senators questioned the president's plan to make the Federal Reserve the top watchdog for systemwide risks. The Fed already has another huge job – managing monetary policy – and is designed to be independent of politics. Some lawmakers said that independence could be threated, in Obama's plan, by a provision that Treasury approval would be needed before the Fed could take certain emergency steps. Others worried about the Fed being stretched with too many duties.
Sen. Mark Warner (D) of Virginia suggested that a Treasury-led oversight panel – which plays an advisory role under Obama's plan – should be more than a "debating society." Perhaps it should take the lead as a supercop for financial markets, rather than the Fed, he said.