Fed fights to keep oversight of smaller banks

Bernanke cites loss of insight, expertise if changes are made

By Sewell Chan
New York Times / March 18, 2010

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WASHINGTON — Officials at the Federal Reserve are trying to alter a Senate proposal that would focus the Fed’s regulatory attention on the nation’s biggest banks and strip away its powers over small and medium-size banks.

The proposal, which was introduced on Monday by the chairman of the Senate Banking Committee, would make the Fed even more centered on New York and Washington and disrupt an institutional balance in place since the central bank opened its doors in 1914, officials said.

“It’s not the central bank of Wall Street,’’ Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, said in an interview. “It’s the central bank of the United States. Let’s not forget that.’’

The Fed chairman, Ben Bernanke, made the same point in testimony to the House Financial Services Committee yesterday.

“We are quite concerned by proposals to make the Fed a regulator only of the biggest banks,’’ he told Representative Melvin L. Watt, Democrat of North Carolina. “It makes us essentially the ‘too big to fail’ regulator. We don’t want that responsibility. We want to have a connection to Main Street as well as to Wall Street.’’

Bernanke, who noted that small institutions were involved in crises from the bank failures of the 1930s through the savings-and-loan collapse in the 1980s, added, “We need to have insights into what’s happening in the entire banking system to understand how regulation affects banks, to understand the status of the assets and the credit problems of banks at all levels, at all sizes.’’

As part of an overhaul of financial regulation, the chairman, Senator Christopher Dodd, Democrat of Connecticut, had proposed in November that the Fed be stripped of all bank supervision powers and focus almost exclusively on monetary policy.

In a revised bill released on Monday, he proposed granting the Fed oversight of all systemically important financial institutions, not just banks.

While the new proposal would leave the Fed with responsibility for about 35 bank holding companies, each with $50 billion or more in assets, about 4,900 smaller bank holding companies and 850 state-chartered banks that are members of the Fed system would become the responsibility of other regulators.

Paul Volcker, a former Fed chairman who has advised the Obama administration, said the $50 billion threshold — Dodd had originally proposed $100 billion — seemed to be “rather arbitrary.’’ He said the Fed’s 12 district banks “provide a window into both banking developments and economic tendencies in all regions of the country.’’

The regional banks would have the most to lose under Dodd’s proposal, which would enhance the New York Fed’s status as the first among equals.

The New York Fed is the largest and most powerful of the 12 banks, and it also conducts the open-market operations by which the Fed expands or contracts the supply of credit in the economy.

J. Alfred Broaddus Jr., a retired president of the Federal Bank of Richmond, said of the Dodd proposal, “It will tend to sway the balance of power and influence within the Fed to some degree away from the non-New York banks toward the Fed power centers in Washington and New York.’’

Anne M. Khademian, a political scientist at Virginia Tech who has written about the Fed, said the Senate proposal was partly a response to a longstanding criticism that the Fed cared more about monetary policy than bank supervision.

“Despite the criticism of supervision by the Fed, there is some pretty sophisticated expertise in the regional banks that would be lost,’’ she said of the proposal. “To get a broad picture of systemic risk, you need to look at the smaller banks.’’

Hoenig, of the Kansas City Fed, is the longest-serving of the 12 current presidents. His district covers all or part of seven states, and he said it had served as an early-warning system for pressures in various sectors of the economy, from commercial real estate to agriculture.

The president of the Boston Fed, Eric S. Rosengren, has published research asserting that information collected by bank supervisors can improve the forecasts of inflation and unemployment that Fed policy makers consider when setting interest rates.

Ben Bernanke's tenure as Fed chief

Ben Bernanke's tenure as Fed chief

Key dates in Ben Bernanke's tenure as Fed chief