WASHINGTON (Reuters) - Not so fast, the Federal Reserve told Congress on Wednesday about a Bush administration proposal to revamp government oversight of the financial system.
“We should not lose some of the powers we have now,” Fed Chairman Ben Bernanke told the congressional Joint Economic Committee.
Treasury Secretary Henry Paulson unveiled a blueprint this week aimed at streamlining the crowded structure of U.S. financial regulatory agencies.
While initially conceived as a road map for freeing financial firms from perceived regulatory encumbrances, the proposal cited recent financial market turmoil as supporting the need for modernizing financial industry oversight.
Prominent among the administration’s recommendations were new roles for the Fed. Eventually, the U.S. central bank would assume overall responsibility for ensuring financial market stability and monitoring risks across the system.
In exchange, however, the Fed would leave front-line supervision of financial and bank holding companies and state-chartered banks to other agencies.
But Bernanke and others argue it is precisely that supervisory contact that enables the Fed to do what it already considers part of its mandate: to make sure financial sector problems don’t spill over and drag down the economy.
“The Federal Reserve’s current authorities to examine banks and to make rules for banks, including capital rules, for example, provides us with an enormous amount of information, as well as the expertise that we need to understand what’s happening in the financial markets,” Bernanke said.
The central bank chairman, testifying for the first time since the Fed helped orchestrate a dramatic rescue of failing investment bank Bearn Stearns a little over two weeks ago, said he would be concerned if the central bank lost not only the ability to enter banks and examine them, but to set standards.
“We would continue to require the ability to evaluate and in some cases make rules concerning the financial systemic stability of major financial institutions,” he said.
Although the Fed would have access to data culled by other regulators under the Paulson blueprint, Bernanke said that would not be enough for the Fed to do its job of ensuring the stability of the financial system.
“We could not successfully carry out this mission if we had to rely entirely on second-hand reports from primary supervisors of these individual institutions,” he said.
In another recommendation, the Treasury proposed that the Fed be granted greater supervisory powers over so-called non-depository institutions, the investment banks that the central bank has recently allowed to tap direct Fed loans as part of exceptional measures to calm unsettled markets.
Bernanke sought to allay any concern that the Fed lacked insight into these powerful financial firms, to which it is now lending tens of billions of dollars, emphasizing the Fed was already collaborating with other regulators.
Whatever the weaknesses of the current regulatory regime, the Fed’s facilitation of Bear Stearns’ purchase by rival JPMorgan Chase by taking on up to $30 billion of Bear Stearns’ shaky assets illustrates that the central bank can act quickly if it feels financial stability is at stake.
“They’re already the market stability regulator,” said Julia Coronado, an economist for Barclays Capital. “That’s something that they clearly see as intertwined with their dual mandate,” she added, referring to the Fed’s congressionally mandated mission to pursue both stable prices and maximum employment.
Editing by Dan Grebler