Geithner, Bernanke clash over consumer financial protection agency

The case for the proposed consumer financial protection agency is clear, Treasury Secretary Timothy Geithner told Congress today — but not to Federal Reserve Chairman Ben Bernanke. In the years leading up to the financial crisis, capital flowed heavily to unsupervised operations such as mortgage companies and brokers, Mr. Geithner said in testimony prepared for a House Financial Services Committee hearing on regulatory perspectives on the Obama administration's financial-services-reform plan. Regulated banks “were left with the untenable choice of lowering their standards to compete or giving up market share,” he said. “The proposed CFPA would fix this problem and ensure a level playing field by extending the reach of federal oversight to all financial firms, no matter whether they are banks or non-banks,” Mr. Geithner said. Speaking after him, however, Mr. Bernanke said that regulatory agencies that oversee different segments of financial services are in the best position to protect consumer interests. “Risk assessment and compliance monitoring of consumer and prudential regulations are closely related and thus entail both informational advantages and resource savings,” he said in his prepared testimony. The CFPA proposed by the administration would oversee banks, credit card companies, mortgage companies and other financial institutions, and would be given the authority to require those companies to offer simplified “plain-vanilla” mortgages, credit cards and other products to enable consumers to compare them with more complicated products on the market. “Poorly designed financial products and misaligned incentives can at once harm consumers and undermine financial institutions,” Mr. Bernanke said. In fact, he added, “as with subprime mortgages and securities backed by these mortgages, these products may at times also be connected to systemic risk.” Mr. Bernanke defended the Fed's track record for consumer protection, saying that in the last three years, it has adopted strong consumer protection measures for mortgages and credit cards.