Who's afraid of banks? Not the Fed, official says

By John Poirier

WASHINGTON (Reuters) - As U.S. regulators reflect on lessons learned from the subprime mortgage crisis, the Federal Reserve admitted on Tuesday it should have been more forceful with the banks it supervises.

Fed Vice Chairman Donald Kohn told a Senate Banking Committee hearing that the Fed had tried to warn banks of potential threats to their balance sheets from years of easy credit and complex securitized products.

"One of the lessons learned is that we need to be more forceful," Kohn said when pressed by Sen. Richard Shelby, the top Republican on the panel, to explain why bank regulators did not spot subprime mortgage problems earlier.

"We did not perform flawlessly. I absolutely agree with that," Kohn said, adding that the Fed was conducting an internal review of what it should have done differently.

Asked by Shelby if the Fed was afraid of the banks that it supervises, Kohn responded: "No."

More of the Fed's findings could be discussed in early May, when Committee Chairman Christopher Dodd says he will hold another hearing to focus again on ways to stem soaring home foreclosures.

Through public speeches and private meetings with bank representatives over years, the Fed tried to warn banks about their exposure to risky subprime mortgages before they exploded into the current crisis, Kohn said.

"That might not be the most effective way to make a point." said Democrat Jack Reed of Rhode Island. "I have to ask questions about the culture of regulation at the Fed."

The hearing provided a glimpse into how the Fed, which is most known for its role as the powerful U.S. central bank, communicates with individual banks it supervises.

The Fed and other U.S. banking regulators have been criticized for not doing enough to stave off a mortgage crisis that now affects millions of Americans.

"A lot of people believe the Fed was asleep at the switch," Shelby said.

U.S. Comptroller of the Currency John Dugan told lawmakers that regulators and bank executives were lulled into a false sense of security by the triple-A ratings of highly complex securities linked to subprime mortgages. Regulators are now telling banks to do more of their own due diligence and to rely less on credit raters' evaluations.

Kohn defended the Fed, saying it was "a very hard sell" for the Fed to get banks to focus on potential risks when the U.S. economy was booming and banks enjoyed record earnings. The Fed supervises about 5,000 bank holding companies with consolidated assets of about $14.2 trillion and 870 state member banks with more than $1.5 trillion in assets.

"It's a hard sell for the banks, yes, but you're the supervisor," Shelby responded impatiently. "You're also the central bank, so you have not just a little bit of power, but a lot of power."

(Reporting by John Poirier; Editing by Dan Grebler)