Don't Mess With the Fed

Senator Dodd needs to rethink this issue

Among the more troubling ideas embodied in the Restoring American Financial Stability Act launched in mid-March by Sen. Christopher Dodd, D-Conn. , is one that would remove from Federal Reserve supervision bank and thrift holding companies with assets of less than $50 billion. In other words, the Fed's pipeline to Main Street would be severed.

Already on the defensive for what some saw as the central bank's flawed efforts to avert financial Armageddon - never mind that they worked - officials spent the ensuing days vigorously and articulately defending their turf. As well they should. Taking several thousand community banks out of the Fed network makes no sense.

Even before the Banking Committee chairman unveiled his plan, bankers were up in arms about anticipated threats to the Fed's district bank structure and Main Street's influence on monetary policy. The presidents of six trade associations, representing banks of all sizes plus the securities industry, argued in a letter to Senator Dodd and his committee's ranking member, Sen. Richard Shelby, R-Ala.:

"The hands-on supervisory experience of the Federal Reserve conducted through its 12 regional Federal Reserve Banks directly informs its monetary policy analysis, keeping it closely connected with financial and economic conditions as they develop throughout the country."

With Dodd's plan, the St. Louis and Kansas City Feds would not regulate any banks or holding companies, and the Atlanta, Minnesota, Richmond and Dallas Feds would supervise no more than three each. The New York and Chicago Feds would regulate the 50-plus companies with assets of more than $50 billion.

The importance of regulating small banks as well as the largest ones was emphasized by Federal Reserve Board Chairman Ben Bernanke in testimony before the House Financial Services Committee on March 17. "The Federal Reserve's participation in the oversight of banks of all sizes significantly improves its ability to carry out its central banking functions," he said, "including making monetary policy, lending through the discount window and fostering financial stability."

Kansas City Fed President Thomas Hoenig framed the issue this way in addressing bankers at the American Bankers Association's Government Relations Summit in Washington on March 18: "Stripping the Federal Reserve of its responsibility for supervising regional and community banks and bank holding companies should be unacceptable to anyone who cares about equity in the nation's banking system, largest to smallest bank, and to the nation's local and regional economies. Confining the Federal Reserve's supervisory role to only the largest firms will, I fear, inadvertently make the Federal Reserve the central bank to the largest firms while disenfranchising the other 6,800 banks."

The Dodd legislation does have merits, most notably its proposed remedies for too big to fail. As FDIC Chairman Sheila Bair put it in addressing the Independent Community Bankers of America convention last month, "Job number one must be to level the playing field once and for all and to put an end to the doctrine of too big to fail." That should be Senator Dodd's top priority if he wants effective regulatory reform. Emasculating the Fed won't help.

[Author Affiliation]

Bill Poquette

Editor-in-Chief

bpoquette@banknews.com