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Paulson Raises Regulatory Specter

Nat Worden

Treasury Secretary Hank Paulson said Wednesday that new regulations could be needed for investment banks since they were granted access to credit from the Federal Reserve in order to weather the financial storm that has engulfed Wall Street.

Paulson's comments came after the Fed recently provided $30 billion in emergency funds to help JPMorgan Chase(JPM Quote) buy Bear Stearns (BSC Quote) in a fire sale and agreed to allow broker-dealers to borrow directly from the central bank. That marked the broadest expansion of the Fed's powers since the Great Depression.

Paulson noted that only commercial banks and depositary institutions that are subject to "strong prudential oversight" from the Fed have had access to such credit, which has explicit backing from the U.S. taxpayers.

"Now that the Fed is granting primary dealers temporary access to liquidity facilities, we must consider the policy implications associated with such access," said Paulson in a speech to the U.S. Chamber of Commerce. "These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability."

He added that "for the non-depository institutions that now have temporary access to the discount window, I believe a few constructive steps would enable the Federal Reserve to protect its balance sheet, and ultimately protect U.S. taxpayers."

Paulson did not make specific recommendations for regulatory changes, but he did say the recently created Term Auction Facility to lend more cash to commercial banks could provide a model for transparency, disclosing the eligible institutions and the magnitude and pricing structure of the lending program. He also stressed that the Fed's extraordinary step in providing liquidity to investment banks was made only on a temporary basis.

"Despite the fundamental changes in our financial system, it would be premature to jump to the conclusion that all broker-dealers or other potentially important financial firms in our system today should have permanent access to the Fed's liquidity facility," said Paulson. "Recent market conditions are an exception from the norm. At this time, the Federal Reserve's recent action should be viewed as a precedent only for unusual periods of turmoil."