Systemic banking risk within Congress' purview

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - The U.S. Congress probably has broad authority to empower regulators to take over big banks and other giant financial companies, even if shareholders and other creditors lose out, analysts said.

The Obama administration is expected to propose on Wednesday the biggest regulatory overhaul of the industry since the 1930s, including giving the Federal Reserve power to oversee systemic risk in the economy in conjunction with an inter-agency council of regulators.

In extreme circumstances, such power could include seizing control of a bank or insurer whose failure could threaten the financial system. That could further upset investors already enraged by the government's directives to the auto industry.

But analysts said Congress' legislative power would make it tough for financial companies' creditors upset over how their interests are treated to raise constitutional challenges.

"The answer is probably no," said Adam Pritchard, a law professor at the University of Michigan. "Legislators may make it clear that the systemic risk regulator's authority trumps other agencies. It is possible to avoid constitutional issues by allowing the president to select the head of the uber-risk regulator, subject to Senate approval."

Reforms to the regulatory scheme are designed to repair the current patchwork of oversight and limit risk that companies can take. One goal is to reduce the chance that any one firm becomes so overextended that failure to intervene threatens financial and credit markets.

BUILT-IN RISK

In the last 16 months, the government has provided broad support to several companies considered too important to fail, including Bear Stearns Cos, Fannie Mae, Freddie Mac, American International Group Inc, Citigroup Inc and Bank of America Corp.