Bernanke to Defend Fed’s Oversight Powers

BY Carolyn O'Hara  March 17, 2010 at 11:48 AM EST

Fed Chairman Ben Bernanke will defend the central bank’s ability to oversee small and large banks alike in an appearance before the House Financial Services Committee Wednesday, according to prepared testimony. Bernanke’s position takes on financial reform legislation unveiled Monday by Sen. Chris Dodd, D-Conn., in which it is proposed that the Fed be stripped of its oversight over smaller state-chartered banks and bank holding companies that have less than $50 billion in assets.

Under the proposed legislation, the Fed would regulate the nation’s 35 largest bank holding companies, as well as financial firms deemed so large that their collapse could threaten the U.S. economy.

Bernanke will argue that oversight of smaller banks helps the Fed better set monetary policy. “The Federal Reserve’s participation in the oversight of banks of all sizes significantly improves its ability to carry out its central banking functions, including making monetary policy, lending through the discount window, and fostering financial stability,” according to Bernanke’s testimony.

Officials at the Fed’s 12 regional banks are also reportedly dismayed about the proposed changes to the Fed’s oversight. If Dodd’s changes take effect, both the Kansas City Fed and the St. Louis Fed would have no banks under their supervision, according to the Associated Press.
Dodd’s bill also proposes that a consumer protection agency be housed within the Fed. That’s in contrast to the House version of the financial reform bill, which proposes a standalone agency. (The House version also left the Fed supervisory role over banks big and small intact.) The new agency would be headed by a director appointed by the president, set its own budget, and be financed by the Fed. In his prepared remarks Wednesday, Bernanke does not address the Fed’s current or potential role in protecting consumers.

Housing consumer protections at the Fed has come under criticism by those who argue that the Fed’s past record on consumer matters has been poor. Others have argued that the Fed’s role in avoiding threats to the economy could create a conflict of interest when it needs to determine consumers’ best interests. Bernanke has recently admitted that the Fed could have done more to address the housing bubble and subprime crisis this decade, and has asserted that the Fed is stepping up its commitment to consumer protections. But that may do little to quiet the critics, and the Fed’s role is likely to continue to be central in the debate over the financial reform bill.