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Fed Expected to Relinquish Oversight of Smaller Banks

18 March 2010 - News - Editor

Following the unveiling of a bill initiated by Senate Banking Committee Chairman Christopher Dodd outlining financial oversight reforms, Federal Reserve Chairman Ben Bernanke took the opportunity of appearing before the House Financial Services Committee on Wednesday (17 March) to defend the necessity for the Fed to retain its broad authority over banks of all sizes. In a prepared statement presented before a congressional hearing, Bernanke emphasized that the Central Bank's authority to supervise and regulate all banks, irrespective of their size, plays a significant role in improving the effectiveness of monetary policies, as well as carrying out its central banking functions, and thereby promoting financial stability.

The Dodd's reform bill calls for redirecting the Fed's authority over regional and community banks with assets below $50 billion, to the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). However, Bernanke drew attention to the benefits of overseeing the banking system 'as a whole', and how this is achieved by the Fed. Although the Federal Reserve's main function is to oversee US monetary policy, it has become the prime regulator of all banks. Bernanke further stressed that it requires the type of expertise and infrastructure that the Fed offers to successfully implement and oversee risk management practices in order to ensure the safety and soundness of all banks, regardless of their size, or where they may operate within the United States.

Bernanke has reportedly been open to the possibility of the Central Bank relinquishing some of its authority over banks, proposing that the Fed be subject to a Congressional review of some sort. In his testimony Bernanke noted that the current financial crisis is a case in point that those in charge of monetary policy should also be in charge of banking oversight. Bernanke’s consistent stance on the Fed retaining banking oversight has been endorsed by former Fed Chairman Paul Volcker who has been quoted as saying that "monetary policy and concerns about the structure and condition of banks, and the financial system more generally, are inextricably intertwined."

The Federal Reserve currently supervises 4,974 holding companies, as well as 844 individual state-chartered banks. If the Dodd's bill goes through, the Fed would be reduced to regulating only 55 holding companies. Many agree that this would require a reworking of the entire system and raises questions about the current structure, and even the necessity, of the 12 Federal Banks spread around the country according to population density. Clearly, there is much to be considered about cutting the Fed's oversight authority, and stock market players will no doubt be watching with keen interest as the scenario unfolds.

 


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